If you’ve recently started working for yourself, you might be wondering how to take money out of your business.
A common question is whether you can put yourself on the payroll or receive a regular salary like you would in a normal job. In fact, it’s something we’re asked regularly at ByteStart.
The short answer is no – at least, not in the same way as a limited company director.
As a sole trader, you don’t receive a salary. Instead, you pay yourself by taking drawings from your business. It sounds more complicated than it is, and once you understand how drawings work, managing your finances becomes much more straightforward.
There’s no salary when you’re self-employed
When you operate as a sole trader, there’s no legal separation between you and your business. The money your business earns belongs to you, so there’s no need to pay yourself a wage through PAYE.
Instead, you simply transfer money from your business account to your personal account whenever you need it. These withdrawals are known as drawings.
When it comes to tax, what matters is the profit your business makes over the tax year – not how much money you’ve withdrawn for yourself.
How much can I take out?
You can usually withdraw as much as you like, provided there’s enough money in your business account.
There’s no minimum or maximum amount, and you don’t need to tell HMRC every time you transfer money to yourself.
Many sole traders choose to leave some money in the business to cover future tax bills and day-to-day running costs. Good bookkeeping and regular cash flow forecasting can help you avoid taking out more than your business can comfortably afford.
Can I pay myself every month?
Yes. Although you’re not receiving a salary, many sole traders transfer themselves a regular amount each month.
Doing so can make personal budgeting easier while helping you leave enough money in the business to pay suppliers and future tax bills. Others simply take money out whenever they need it. There’s no right or wrong approach.
Do I need a separate business bank account?
There’s no legal requirement for sole traders to have a business bank account, but many find it makes life much easier.
Keeping business income separate from personal spending makes your accounts easier to manage, particularly when completing your Self Assessment tax return.
It also makes drawings much easier to identify, as they’re simply transfers between your business and personal accounts.
Read more: Do I need a business bank account as a sole trader?
What records do I need to keep?
Drawings aren’t a business expense, so they don’t reduce your taxable profit.
Keep records of your business income and allowable expenses in the normal way, and record any money you’ve withdrawn separately as drawings.
If you use accounting software such as Xero, QuickBooks or FreeAgent, drawings can usually be recorded with just a couple of clicks.
Do I need to pay National Insurance?
Yes, if your profits are high enough.
National Insurance is based on your business profits, not the amount you’ve paid yourself. This often catches out new sole traders, particularly if they transfer a regular amount to themselves each month.
If you’re unsure how profits are calculated, our guides to turnover and allowable business expenses explain what counts towards your taxable profit.
What about pensions?
Unlike employees, sole traders don’t receive employer contributions to a workplace pension.
You can still pay into a personal pension and normally receive tax relief on your contributions.
Read more: How to set up a pension as a sole trader.
Should I register for PAYE?
Not to pay yourself.
PAYE only becomes relevant if you employ somebody else, or if you later decide to operate through a limited company.
How does this compare with employees and limited companies?
| Working arrangement | How you’re paid |
|---|---|
| Sole trader | Drawings from business profits. |
| Employee | Salary through PAYE. |
| Umbrella company employee | Salary through PAYE, with the umbrella company acting as your employer. |
| Limited company director | Usually a combination of salary through PAYE and dividends. |
If you’re wondering whether remaining a sole trader is still the best option, our guide to sole trader vs limited company explains the main differences, including how you’re paid, your tax responsibilities and the extra administration involved.