The difference between freelance, sole trader and self-employed isn’t so much a question of yawning canyons. It’s more a matter of subtle nuances, with a healthy dose of overlap thrown in.
In fact, it’s a bit like the difference between a Pink Lady, a Golden Delicious or a Cox’s Orange Pippin. At the end of the day, they’re all apples and essentially the same fruit. It’s just that each one tastes a bit different.
To establish what each of these three terms means, we'll look at each of them in turn. We'll examine the implications of identifying as one or the other of them, including what that means for your business structure and tax, as well as where the overlaps lie.
Difference between freelance, sole trader & self-employed
This is an umbrella term. It simply indicates someone who works but isn’t employed by a company or by another individual. Instead, they work for themselves and are in control of what they do. They might even employ others.
Both freelancers and sole traders are self-employed and fall into this category. But it’s not an exclusive club for them alone because the self-employed can also trade as a limited company (albeit with different obligations).
The important bit is that someone who’s self-employed chooses what work to do, when to do it, and how. That can be anything from supplying hand-made toys to a single shop, to providing financial advice to dozens of clients.
Anyone self-employed is responsible for any profits they generate or (unfortunately) for any losses they make. And, unlike limited companies, their personal liability is unrestricted. That can be significant if things go pear-shaped and debts mount up.
It’s a consequence of a self-employed person and the work they do being seen as part of the same whole. A limited company, on the other hand, is viewed as a separate entity from the person who created it - even if they’re the sole director and employee.
This term is used widely in the creative industries, so you get a lot of freelance copywriters, web designers, photographers – that sort of thing. Although equally, you could be a self-employed IT consultant and describe yourself as ‘freelance’.
People also tend to call themselves ‘freelancers’ when they’ve been employed and paying tax through PAYE but decide to branch out on their own. Really, it’s just a way of saying you’re now self-employed and fending for yourself.
Freelancers generally hire out their services to a number of different clients for a set fee or by the hour. They often work on single pieces of work or on short-term projects. It’s unusual for a freelancer to supply just a single client, as a sole trader might.
What all freelancers must do is inform HMRC of their status. Whereas employees pay tax through PAYE deducted at source, the system for anyone self-employed is different. They must submit an annual self-assessment tax return and pay income tax and Class 2 and 4 National Insurance contributions.
That involves keeping scrupulous accounts, including dated invoices and receipts for any expenses.
Sole traders are very similar to freelancers in that both are self-employed and pay tax by self-assessment. It’s really the type of work they do and the way they do it that sets the two slightly apart.
Setting up as a sole trader is the simplest way of structuring your business and getting it off the ground. It’s only a matter of informing HMRC you’re trading, in the same way as for freelancers. There’s no complicated form-filling or formal registration process to negotiate.
And that’s where being a sole trader differs from setting up as a limited company. Because that involves naming a director, registering with Companies House, and submitting annual accounts. (Although to confuse matters, both freelancers and sole traders can also operate as limited companies.)
Limited companies also pay tax differently because, even if the company consists of just one person, that person is effectively treated as an employee. That’s why they have limited liability and their personal finances are protected should the company go into debt.
So, while very similar to freelancers, sole traders are slightly set apart because they tend to work in a somewhat different way. Whereas freelancers usually sell a skill or service, any type of small business can operate as a sole trader, be that retail, hairdressing, plumbing or whatever. Sole traders can even have employees.
Protecting your business
So, the difference between freelance, sole trader and self-employed in business terms really isn't very great. Neither is there much of a difference in the type of everyday risks they face. The kind of perhaps unforeseen risks that can hit any business's finances hard and even stop it trading altogether.
One of the most reliable ways of weathering the storm should risk turn to grim reality is to protect your business with insurance. Because a claim against you for substandard work, third-party injury or property damage can, quite frankly, be ruinous.
You’ll need a lawyer’s help to defend a claim against you. Plus, there’s other legal costs to consider and the harsh reality of having to pay compensation and damages. Add that lot up and you get a figure that can run to many thousands of pounds.
As a solo operator, it’s not very likely you have that kind of cash lying around. The good news is that business insurance throws a protective arm around you and your livelihood. It pays legal costs and covers any compensation on your behalf - all for a monthly premium.
Professional indemnity insurance and malpractice insurance deal with accusations your work wasn’t up to scratch. It covers things like breach of copyright and confidentiality too. And public liability has your back if anyone says it’s your fault they were injured or their property was damaged.
That’s for starters, and you can also get cover for your equipment, employees, data, and a whole lot of other things. That way, although you're self-employed and operating solo, you won't bear the sole financial burden if things go wrong.freelancersmanaging riskrules and regulations