Starting your own business is exciting, you’re your own boss, making your own money, and building something from the ground up. But when it comes to actually paying yourself, things can feel a little less straightforward. Unlike employees, sole traders don’t get a regular salary or payslip, so how do you pay yourself from your business, stay compliant with HMRC, and make sure you’re doing it in the most tax-efficient way possible?
In this article, we’ll walk you through exactly how to pay yourself as a sole trader in the UK, how to manage your drawings, what to set aside for tax and National Insurance, and when paying yourself dividends might become an option if you ever switch to a limited company.
What “Paying Yourself” Really Means
When you’re a sole trader, you and your business are legally one and the same; there’s no separation between the money you earn and the money the business makes. That means you don’t take a “salary” like an employee would. Instead, you pay yourself through personal drawings from your business profits.
Each time you transfer money from your business account to your personal account, you’re simply taking a portion of the profits you’ve already earned. But here’s the key thing: those drawings aren’t a tax-deductible business expense. You’ll still pay Income Tax and National Insurance on your overall profit, not on how much money you withdraw.
This is why good bookkeeping is essential. By keeping accurate records of all your drawings, incomings, and outgoings, you’ll have a clear view of your profits and how much of it you can safely take home.
Step-by-Step: Paying Yourself from Your Business Account
If you’re wondering how to pay yourself from your business in a practical, stress-free way, here’s a simple process:
1. Open a dedicated business bank account.
Keep your business and personal finances separate; it’s easier for bookkeeping, tax returns, and tracking cash flow.
2. Transfer funds as personal drawings.
When you need to pay yourself, make a bank transfer from your business account to your personal account. Label the transaction clearly (e.g., “Owner’s Drawings”).
3. Record every withdrawal.
Log each payment in your accounting records. This helps calculate your profit correctly when you file your Self Assessment.
Put aside money for taxes.
Don’t forget HMRC will want its share. The easiest way to avoid a nasty surprise is to set aside tax as you go, ideally in a separate savings account.
In short, treat your business account like a professional employer paying you, even though technically, you’re both the boss and the employee!
Why You Need a Separate Business Bank Account
While it might seem simpler to use one personal account for everything, this can quickly become a nightmare at tax time. Imagine scrolling through hundreds of transactions trying to remember whether that WHSmith purchase was stationery for your business or a sandwich for lunch.
A business bank account helps you:
- Stay organised and track business spending easily.
- Simplify your Self Assessment tax return.
- Avoid any issues or scrutiny from HMRC.
- Present your business more professionally to clients and lenders.
Many UK banks offer affordable business accounts, often with free introductory periods. So, while there might be a small monthly fee, the clarity and professionalism it brings are worth every penny.
How Much Should You Pay Yourself as a Sole Trader?
One of the biggest advantages of being self-employed is flexibility; you decide how much to pay yourself and when. But with that freedom comes responsibility.
There’s no fixed “salary” as a sole trader, so the amount you pay yourself should depend on three main factors:
- Your business performance: How much profit you’ve made after covering expenses.
- Your personal needs: What you need to cover household costs and living expenses.
- Your tax obligations: How much you’ll owe HMRC at the end of the year.
A smart approach is to pay yourself regularly (weekly or monthly) to mimic a wage, while keeping enough money in the business to cover expenses, reinvestment, and tax.
Finding the Right Balance Between Business and Personal Needs
It’s easy to get carried away when your business starts doing well, but remember, not all the money in your business bank account belongs to you. Some of it will need to be covered:
- Business expenses (materials, software, subscriptions, etc.)
- Tax and National Insurance
- Emergency funds for quiet months or unexpected costs
- Future reinvestment in your business growth
Once you’ve set aside enough for these essentials, the remaining profit can be safely transferred to your personal account.
A simple budgeting approach could look like this:
- 25–30% for tax and NICs
- 10% for savings or reinvestment
- The remainder for personal drawings
This ensures you stay prepared for tax season without jeopardising your cash flow.
How Much Tax Should You Set Aside as a Sole Trader?
As a sole trader, your tax is calculated on the profit your business makes, that’s your total income minus allowable business expenses. You’ll pay both Income Tax and National Insurance Contributions (NICs) through your annual Self Assessment.
Here’s a general guide to how much you should put aside for tax depending on your profit level:
| Annual Profits | Recommended % to Set Aside for Tax |
| Up to £50,000 | 25% |
| £50,000–£100,000 | 40% |
| £100,000–£150,000 | 45% |
| Over £150,000 | 45%+ |
These percentages are estimates, but they’ll help you stay on track and avoid last-minute panic when the tax deadline rolls around.
Income Tax and National Insurance Explained
For the 2025/26 tax year, here’s how things work:
- Class 2 NICs: No longer mandatory for profits over £6,725 (though you can pay voluntarily to protect your state pension).
- Class 4 NICs:
- 6% on profits between £12,570 and £50,270
- 2% on profits over £50,270
Income Tax rates apply in the usual bands:
- 20% on income up to £50,270
- 40% between £50,271 and £125,140
- 45% above £125,140
These contributions are calculated automatically when you submit your Self Assessment, but it’s wise to track them throughout the year so nothing catches you off guard.
When and How to Pay HMRC?
Your profits are reported to HMRC each tax year via your Self Assessment Tax Return. The key deadlines are:
- 31st January – File your return and pay your main tax bill.
- 31st July – Pay your second “Payment on Account” (if applicable).
If your annual tax bill exceeds £1,000, HMRC will usually ask for Payments on Account, essentially prepayments towards next year’s tax bill.
If you expect to earn less next year, you can ask HMRC to reduce these payments, but be cautious and accurate, as underpaying can lead to penalties later.
Comparing Sole Trader Pay vs. Limited Company Pay
Many sole traders eventually ask themselves whether becoming a limited company could make paying themselves more tax efficient. The truth is, it can, but only in certain circumstances.
Let’s compare the two structures side-by-side:
| Business Type | How You Pay Yourself | Tax Paid On | Pros | Cons |
| Sole Trader | Personal drawings | Business profits (Income Tax + NICs) | Simple setup, minimal admin | Higher personal tax at higher income levels |
| Limited Company | Salary + dividends | Corporation Tax + Personal Tax | Potentially more tax efficient | More admin, higher running costs |
Paying Yourself Dividends (For Limited Company Owners)
If you decide to form a limited company later on, you can start paying yourself dividends from your company’s post-tax profits. Dividends can be a tax-efficient way to pay yourself, since they’re taxed differently from salary income.
However, there’s one major rule:
You can only pay yourself dividends if your company has made sufficient profits after paying Corporation Tax.
So, how much dividends can I pay myself?
Technically, as much as your company’s available profit allows, but always keep a reserve for business expenses and future tax bills.
For example, if your company earns £50,000 after tax and you take £30,000 as dividends, that’s fine, provided you leave enough to cover ongoing business costs.
As a sole trader, though, dividends aren’t an option; your pay will always come from drawings on business profit.
What Is the Most Tax-Efficient Way to Pay Yourself?
There’s no one-size-fits-all answer when it comes to the most tax-efficient way to pay yourself; it depends on your business structure and personal circumstances.
For sole traders, the most effective tax strategy usually involves:
- Claiming all allowable business expenses to reduce your taxable profit.
- Keeping detailed records to ensure nothing is missed.
- Setting aside the right percentage of profits for tax and National Insurance.
This way, you’ll only pay tax on your true profit, not on business costs.
For those running a limited company, a common approach is to take a small salary (usually within the tax-free Personal Allowance) and top it up with dividends. This balance can help reduce your overall tax liability, as dividends are taxed at a lower rate than regular income.
If you’re unsure which route is best, it’s always worth consulting a qualified accountant. They’ll analyse your income, expenses, and future goals to identify the most efficient way to pay yourself.
Managing Expenses to Reduce Taxable Profits
One of the best ways to legally and efficiently reduce how much tax you pay as a sole trader is by properly claiming allowable business expenses.
What Counts as an Allowable Expense?
Allowable expenses are costs that are “wholly and exclusively” for business use. Common examples include:
- Office supplies and stationery
- Professional subscriptions or memberships
- Marketing and advertising costs
- Business travel and mileage
- Work-from-home expenses (e.g. a portion of utilities or rent)
- Accounting and legal fees
Each expense reduces your taxable profit, meaning you’ll pay less Income Tax and National Insurance overall.
Good Record-Keeping Pays Off
Keeping receipts, invoices, and digital records is essential. Using accounting software can make this process effortless and ensure you don’t miss any deductible costs. HMRC accepts digital copies, so scanning and uploading receipts saves space and stress.
By staying organised, you not only reduce your tax bill but also gain a clearer view of how much profit you can safely withdraw for yourself.
Combining Income: Employment, Dividends, and Sole Trader Earnings
Many people earn money from multiple sources; perhaps you’re employed part-time while running your own business, or you’ve invested in a company and receive dividends. Here’s how to handle it:
- Employment income is taxed automatically through PAYE. You’ll still need to declare it in your Self Assessment if you also earn self-employed income.
- Self-employed income is taxed through your business profits.
- Dividend income (from company shares) must also be declared, and you’ll pay tax depending on your overall income level.
If you’re wondering “how much dividends can I pay myself?”, remember: dividends are only available to limited company shareholders and must come from profits after Corporation Tax. Sole traders cannot pay themselves dividends; all their earnings are considered personal income.
Combining different income types can make your tax situation more complex, so professional advice can ensure you don’t pay more than necessary or miss key allowances.
Common Mistakes Sole Traders Make When Paying Themselves
Even experienced business owners can trip up when managing their own pay. Here are a few common pitfalls to avoid:
Mixing personal and business finances.
This is the fastest route to confusion and potential HMRC headaches. Always use a dedicated business account.
Forgetting to save for tax.
It’s tempting to treat every payment as personal income, but remember that a portion belongs to HMRC.
Taking too much too soon.
Don’t withdraw more than your business can afford. Keep a cushion for upcoming bills, slow months, or reinvestment.
Not keeping proper records.
Missing receipts or unclear bookkeeping can lead to higher tax bills and unnecessary stress.
Ignoring professional advice.
An accountant’s input isn’t just for big businesses; even sole traders benefit from expert help with tax planning and profit management.
Final Thoughts
Paying yourself as a sole trader doesn’t have to be complicated. Once you understand the basics, that you’re paying yourself through drawings, not a salary, everything becomes simpler. Keep your finances organised, maintain accurate records, and always set aside money for tax.
Over time, you’ll develop a rhythm that keeps both your personal and business finances healthy. And if your business grows, you may want to explore whether becoming a limited company and paying yourself dividends could make your income more tax efficient.
Whatever stage you’re at, the key is confidence and control. With good planning, discipline, and a bit of expert advice, you can make sure your money works as hard for you as you do for your business.
FAQs
Q1: Can I pay myself a salary as a sole trader?
Ans: No, as a sole trader, you take drawings, not a salary. Salaries are only applicable if you’re employed by a limited company.
Q2: What is the most tax-efficient way to pay myself?
Ans: Claim all allowable expenses, set aside tax throughout the year, and plan your withdrawals carefully. If you become a limited company, a mix of salary and dividends can often be more tax efficient.
Q3: Can I pay myself dividends as a sole trader?
Ans: No, only company shareholders can pay themselves dividends. As a sole trader, your income comes directly from your business profits.
Q4: How much should I pay myself each month?
Ans: There’s no set rule. Pay yourself an amount that covers your living expenses while keeping enough in the business for costs, tax, and growth.
Q5: What happens if I also have a job or receive dividends from another company?
Ans: You’ll declare all sources of income in your Self Assessment. HMRC will calculate how much tax you owe overall.
