Are you Self Employed or a Sole Trader?
Many people don’t quite understand what it means when you are self employed or sole trader as it is also known. You are classed as self-employed when you are personally responsible for your own tax and National Insurance contributions. This means that you are running your own business and NO taxes (PAYE or NI) are deducted from the money you receive from your clients.
Example: Mark has a catering business and Mark invoices his clients per function. The clients pay the full value of Mark’s invoices (without deducting any tax) into Mark’s personal or sole trader bank account. Mark is therefore classed as self-employed and he is personally responsible to declare and pay over all taxes due on his taxable income to the HMRC.
A sole trader bank account is a separate bank account that you can set up for all your business dealings.
You are therefore NOT classed as self-employed if you are working as a temp and your employer or whoever pays you, deducts PAYE and National insurance tax from your pay. Also, if you set up a Limited company for your business, your business is not a sole trader business anymore. A limited company is a legal entity on its own and the Limited company will need to pay corporation tax on all its profits. The tax on a Limited company is different to the tax a sole trader/self-employed person needs to pay.
A person that is self-employed needs to file a self assessment tax return at the end of each tax year to declare total taxable income and work out how much tax is due to the HMRC
VERY important: If you are self-employed, then you need to register with the HMRC within three months from starting to trade as self-employed or you will face penalties.