What are the differences between freelancers and self-employed?

Charles BrecqueCharles Brecque
Last updated on:
December 21, 2022
Published on:
January 13, 2022

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There is often a lot of confusion around the differences between being a freelancer and self-employed. A freelancer can be self-employed but not all freelancers are self-employed. It’s important to clarify the main differences between being self-employed or not for tax purposes. This article will explain what a freelancer is, what it means to be self-employed, what it means to freelance via a limited company and how to choose the right structure for your freelance business.

What is a freelancer?

A freelancer is an independent contractor who provides services to different clients. For example, a freelance writer might provide content strategy and development services to startups. Freelancers are not treated as employees for tax purposes and enter into consultancy services agreements with their clients. A freelancer can work in their own name as a sole trader, or alternatively via their own limited company.

What is a sole trader?

A sole trader is a self-employed person who sells good or services in their own name. A sole trader needs to be registered with HMRC if they generate more than £1000 in income per financial year from their self-employed activities. Once you have set yourself up as a sole trader, you will need to:

  • Keep records of your self employed sales and expenses
  • File a self assessment tax return every tax year
  • Pay income tax on profits as well as national insurance

You must register for VAT if your turnover is over £85,000.

As a sole trader, you are effectively your own boss and you can trade in your name or choose a business name. However, your sole trader name can't include limited, Ltd, limited liability partnership, LLP, public limited company or plc. Self-employed individuals need to register your name as a trademark to prevent people from trading under their names.

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What is a limited company?

If you have set up your freelancing business as a limited company, you must ensure your legals are in order before taking on freelance work. Income from your freelance work will contribute to the turnover of your limited company. You limited company will pay corporate tax on its profits and must be registered for VAT if its turnover is over £85,000.

As a small business owner working via your own limited company, you can choose to receive a salary as a full-time employee in which case you will pay tax and national insurance contributions on your income. You can also choose to be paid via profit dividends which are taxed differently.

How to choose the right business structure for your freelance career?

When becoming a freelancer, you will need to consider how you want to structure you own business. Whilst there are different costs and tax implications associated with each type of structure, the legal structure you choose should be based on your vision for the company and if you are planning to expand via partners or external investors.

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The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.

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