Sole Trader Employing Self-Employed Staff

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Peninsula Group, HR and Health & Safety Experts

(Last updated )

Not everyone you hire is classed as an employee. Learn the rules of hiring self-employed staff.

If you're a sole trader and your business is going well, you may feel another pair of hands is needed to share the workload. But you need to understand how to do it properly.

Whether you want to hire an employee, worker, or contractor, there are certain processes and obligations you must follow. You must provide anyone you employ with a certain set of employment rights. Failure to do so can lead to claims being raised against you in the future.

In this guide, we'll discuss what a sole trader is, how to hire staff correctly, and what entitlements you must provide.

What is a sole trader?

A sole trader is someone who is the sole owner of a business and is self-employed.

Sole traders in the UK don't have to register with Companies House or have a director.. Common examples of sole traders are:

  • Tradespeople, such as electricians, plumbers, or gardeners.
  • Freelance workers, such as graphic designers, artists, or web designers.
  • Independent contractors, such as couriers, and food delivery drivers.

What does it mean to be self-employed?

The definition of self-employment in employment can be difficult to understand.

Someone counts as self-employed if they're responsible for the success of the business. As well as deciding what work they do and when they do it. Basically, they're under no direct control when working.

So, if you're a sole trader, you need to know whether you can employ staff to work for you.


Can a sole trader employ staff?

Yes, if you're a sole trader business, you can employ people.

If you're engaging with someone who is self-employed, you're making them responsible for the following:

  • They must pay their own tax and National Insurance.
  • They usually provide any equipment they need for work.

It’s important to remember that self-employed people are engaged in a contract rather than employed.

How do sole traders pay a self-employed person?

When it comes to paying any self-employed people you have, the rules are different to workers. Instead of adding them to your payroll, they will invoice you when they’re finished the work.

Can a sole trader be an employee within their own business?

No, if you're a sole trader you cannot be an employee within your own business. This is because sole traders are completely self-employed.

It’s different from being a limited company. This is classed as a separate legal entity, meaning it can have a contract of employment with its own director or directors.

How does a sole trader set up as an employer?

Setting up as an employer for sole traders is done the same way as limited companies. There are some steps you should follow to ensure you're doing it correctly. It's important you get it right; failure to do so can lead to further problems down the line.

Let's discuss them in more detail to make the process as easy as possible:

Register as an employer

The first step in becoming an employer is to register with the HMRC. This should be done before you hire anyone via an online form. However, this can be done before their first salary payments are due.

Once you're successfully registered, you will be sent an Employer PAYE Reference Number (ENR). This is so you can deduce income tax and National Insurance from wages given to eligible employees. Remember, self-employed people are not paid through the PAYE system.

The following information is required for you to successfully register as an employer:

  • The name of the sole trader.
  • Your unique taxpayer reference.
  • Your National Insurance number.
  • Your trading name (if applicable).
  • Your official business address, and phone number. 
  • The nature of your business.
  • The number of employees expected to be employed in the current tax year.
  • Whether any payments have already been made to employees.
  • If expenses and benefits are intended to be paid to employees.

Find someone to manage your payroll

It's advisable to work with an accountant to manage your payroll. They will keep employee records, provide pay slips, and can even make payments to the HMRC.

If you decide to run your payroll yourself, you may need to use payroll software. This will help to track what you're doing and ensure you're making the correct tax deductions from wages.

Set up a workplace pension scheme

It's a legal requirement in the UK for all employers to provide their staff with an occupational pension scheme. Both parties should contribute to the scheme. Make your employees aware that they can opt out of the scheme if they choose to.

You should never make an employee enroll in a pension if they don't want to, it's their personal choice.


Employment law for sole traders

As a sole trader, you must abide by the following laws:

For example:

  • Completing a self-assessment tax return by the 31st of January each year.
  • Paying National Insurance and income tax on any profit you make.
  • Registering for VAT if your taxable turnover exceeds £85,000.

It's also advisable to keep a record of any business-related receipts so deductions can be made.

If you're looking to employ someone to work for you, you need to know the differences between employees and workers. Both come with different employment rights which you must stick to.

Let's discuss them in more detail:


Employees always work under an employment contract. So to be an employee, you must meet the following :

You also need to be aware of when someone is classed as a worker.


Someone working for you is classed as a worker if they meet the following set of criteria:

  • They have a contract to perform work or services in exchange for money or other benefits.
  • They are generally not allowed to subcontract any of their work.
  • They are required to attend a place of work regularly. 
  • They are entitled to work for the whole duration of the contract.

Despite not being classed as an employee under employment law, they are entitled to the following rights:

  • National minimum wage, sick pay (if eligible), maternity or paternity pay (if eligible), and paid holiday.
  • Protection against unlawful deductions from wages.
  • Protection against all forms of unlawful discrimination.

It's important to remember that failure to provide anyone working for you with their employment rights may lead to them to raise a claim. This could be for unpaid wages or owed holiday pay.

Can a sole trader work with self-employed contractors or freelancers?

Yes, a sole trader can work with self-employed contractors or freelancers. However, there are different rules that you need to be aware of.

The contractor or freelancer doesn't qualify for the same employment benefits during their time working with you. And, they also have a responsibility for their own tax affairs.

However, they are protected against discrimination in some places.

How to end the contract of self-employed people as a sole trader

If you want to dismiss any self-employed staff, there are certain elements you must abide by.

If you have a contract with them that includes a termination clause, you must stick to the terms. You must also stick to any agreed .

Failure to dismiss anyone working for you legally and fairly could lead to claims being raised against you at a civil claim court for breach of contract.

Get expert advice on being a sole trader with Peninsula

When running your own business, you may feel help is needed to share the workload. However, you must take the correct steps if you decide to do so.

No matter what staff type you want to employ, there are certain processes and obligations which must be followed. You must provide anyone you employ with a certain set of rights, failure to do so can lead to claims being raised against you in the future.

Peninsula offers 24/7 HR advice which is available 365 days a year. Want to find out more? Contact us on 0800 029 4376 and book a free consultation with one of our HR consultants.

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