Do you ever find yourself unsure of what to call yourself in relation to your business? Solopreneur? Self-employed? Business owner? Freelancer? These terms all describe individuals who choose to earn a living independently rather than through traditional employment. While the distinction between small business owners and the self-employed may seem subtle at first glance, there are important differences.

The simplest way to distinguish between being self-employed and being a small business owner is by looking at how you operate your business in the UK. If you’re a small business owner, you typically run a business that may involve employing others. On the other hand, if you’re self-employed, you are essentially the business. However, there is some overlap between these terms, which is why they are often used interchangeably.

These distinctions can impact your taxes, personal liability, insurance needs, expenses, and how you report your income to HMRC on your self-assessment tax return. Keep reading to learn more about the key characteristics of small business owners versus the self-employed.

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Defining the Self-Employed

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In simple terms, being self-employed means you work solely for yourself. This means your business is entirely dependent on you, and you’re responsible for creating your own products or services and determining when and how much you work. When you’re self-employed, there’s no PAYE salary, and you don’t receive holiday or sick pay.

The three main categories of self-employed individuals are:

• Sole Proprietor: A one-person business (sole trader) where you receive business profits as personal income. You are also personally liable for all financial obligations.

• Partnership: Similar to a sole proprietorship, but ownership is shared with two or more people. The business and owners/partners are not legally distinct from one another.

• Independent Contractor: You create work for others but remain your own boss. You work on a contractual basis for clients but are not considered an employee. Freelancers often fall into this category.

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Defining a Small Business Owner

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While all small business owners can be self-employed, not all self-employed individuals are business owners. Both share the characteristic of being their own boss, but as a small business owner, you are more likely to have employees or hire independent contractors. Additionally, small business owners often run a brick-and-mortar business where specific products or services are offered.

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Key characteristics of a small business owner include:

• Employee Management: If you have employees, it’s your responsibility to oversee taxes, holiday and sick pay, insurance, and payroll registration.

• Limited Liability Company (LLC): This is a common structure for small businesses because it offers protection for personal finances by limiting personal responsibility for company debts and obligations. It also allows profits and losses to be reported on individual tax returns, avoiding corporate taxation.

• Companies House Registration: As a limited company, you must also register with Companies House.

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Paying Tax for the Self-Employed and Small Businesses

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The most significant difference between the self-employed and small business owners lies in how they pay taxes, as the process differs for each.

As a self-employed individual, you file a self-assessment tax return annually, which HMRC uses to calculate your tax liability. Your business profits are treated as personal income, and you can choose to pay taxes quarterly to avoid a large tax bill at the end of the year.

For small businesses, taxes vary depending on the business structure. For example, if you operate a Limited Company, you do not need to register separately as self-employed, resulting in lower tax rates compared to corporate tax. However, you will still need to complete a self-assessment, reporting your full income, including salary and dividends from your company.

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Both self-employed individuals and small business owners can register for VAT if their annual taxable turnover in the last 12 months or the next 30 days exceeds the VAT threshold. If you meet this criterion, you can register and charge VAT.

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Insurance for the Self-Employed and Small Businesses

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As a self-employed person, you need to protect yourself against potential risks associated with being your own boss. If something goes wrong, the responsibility falls on you. This could include cyber or data breaches, accidents on your business premises, legal action from dissatisfied clients, or equipment theft. The type of insurance you need depends on the nature of your business. For instance, if you interact with the general public, you’ll need public liability insurance.

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For small business owners, the insurance needs mentioned above still apply and are industry-dependent. However, if you have employees, you are also legally required to have employers’ liability insurance to cover claims related to illness or injury sustained while at work.

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While these two terms—self-employed and small business owner—are often used interchangeably, it ultimately comes down to your personal preference, how you view your business, and how you want to be perceived by your clients.

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Related:

• Do I Need to Do Self-Assessment if I Am Not Self-Employed?

• Can You Be Self-Employed and Only Work for One Company?

• Partnership Tax Returns (SA800) Explained

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