Three female entrepreneurs looking at a laptop

1. How to pay yourself as a sole trader

2. How to pay yourself from a limited company
3. How much should I pay myself from my company?
4. The most tax-efficient way to pay yourself

5. Hassle-free accounting

How do I pay myself as a business owner?

September 5, 2022

The day has finally come. You’ve been working your fingers to the bone and things are looking up. It’s time to pay yourself.You’ve already done the hard part: starting a new business and reeling in business profits. But, as a business owner, how do you take a salary?There are a few different options for paying yourself as an entrepreneur, whether you’re a sole trader or are a limited company director.

Please note: the advice in this article is intended for small business owners who have no external source of income, except in sections where this is explicitly stated. If you are looking for more detailed advice depending on your personal situation, please get in touch with one of our accountants.

How to pay yourself as a sole trader

As a sole trader, the all profits earned after tax is yours to keep.

If you’re a sole trader, you’re a self-employed individual. You run your own business, and under this business structure are considered a singular legal entity with your business in the eyes of HM Revenue and Customs (HMRC).

When you’re a sole trader, you keep the profits of whatever you earn after tax. This is slightly different to taking a wage — wages are regular payments made from a company to an employee. Instead, self-employed people pay themselves through business drawings.

If you’re a sole trader, it could be worth aiming to deposit up to 25% of all net income into a separate bank account. This is to ensure you have enough to pay your Self Assessment tax bill after submitting your Self Assessment tax return in January, as well as keeping you prepared for your payment on account installation in July.

To make it easier to keep track of your income and expenses, you might find it beneficial to set up a business bank account. If you're with Ember and set up a business bank account with Tide, we'll get you started by putting £75 in your Tide account, on us!.

How much should I set aside for tax as a sole trader?

How much Income Tax you’ll have to pay depends on how much you earn. It’s important to put away enough, so that there’s no need to panic later down the line.

The Income tax bands in England, Wales and Northern Ireland for the present tax year (2022/23) are as follows:

Band	Taxable Income	Tax Rate
Personal Allowance	Up to £12,570	0%
Basic Rate	£12,571 to £50,720	20%
Higher Rate	£50,271 to £150,000	40%
Additional Rate	£150,000+	45%

Source: gov.uk

If you're in Scotland, you can find the Income tax bands for the present tax year here.

You’ll also need to set aside enough to cover your National Insurance contributions (NICs), with the rates for the 2022/23 tax year outlined below:

Class	Rate for tax year 2022/23
Class 2	£3.15
Class 4	10.25% on profits between £11,909 and £50,270
Class 4	3.25% on profits over £50,270

Source: gov.uk

If you're earning above the £85,000 VAT threshold in a tax year, you’ll need to register for VAT.

HMRC has a handy tool in place to help you budget for Income Tax and National Insurance this year. It’ll let you know how much of your net income you should leave untouched in your business account.

The rest of your profits? It’s all yours — spend it on whatever you like.

What if this is my side-hustle?

If you have income stemming from a full-time or part-time employment alongside your sole trader earnings, you’ll need to declare this on your Self Assessment tax return.

As for your employment income, your employer should have deducted the Income Tax and National Insurance contributions you owe through the Pay As You Earn (PAYE) scheme.

How to pay yourself from a limited company

A limited company is a business owned by shareholders and directors, even if the company is run by just one person, acting as shareholder and director. Paying yourself from a limited company looks a little different, as you’re an employee of a company — even if you’re the only employee.

Here are two reasons why you mind find take a salary from your limited company beneficial:

Salaries are deductible business expenses. That means, by taking a salary, you’ll be lowering the cost of your corporation tax bill

If the salary is above the lower earnings limit (£6,396 in the 2022/23 tax year), you get qualifying years towards your state pension

However, how much you pay yourself depends on different factors, including your total business profits, the position of your cash flow and how much you owe in business tax.

How much should I pay myself from my company?

When it comes to paying yourself as a business owner, it’s safer (and smarter) to be modest.Most company owners take just enough to meet their household living expenses. The rest of the money? It’s left in the business.Striking a balance between your household and business needs is key. This is sensible for keeping your business afloat for those just-in-case moments. We’re all too familiar with surprises springing up from nowhere: pandemics, global financial crises, sickness, etc.Keeping plenty of money in the business, as a buffer, is always your safest bet. That means you’ll be equipped to cover:

Expenses (e.g. software, insurance, staff salaries)

Rainy days (business disruptions)

Reinvestment (think ahead for business developments)

Not only is this smart in terms of security for your business, but paying yourself conservatively, at least to begin with, is also tax-efficient. You can always top up your earnings if your business is doing well, too.

The most tax-efficient way to pay yourself

If you’ve just launched a startup, you’ll want to be as tax-efficient as possible.Paying yourself less than £12,570 means you’ll be comfortably within the confines of your tax-free Personal Allowance. Then, you can top up your salary with dividends from company profits.Dividends are tax-free for the first £2,000 you withdraw during the tax year. Not only that, dividend tax rates are lower than Income Tax rates.The dividend rates for the 2022/23 tax rate are:

Tax band	Tax rate on dividends over the allowance
Basic rate	8.75%
Higher rate	33.75%
Additional rate	38.1%

So, when combined, you can earn up to £14,570 without having to pay a penny on tax.

Deductions to bear in mind

Income Tax and National Insurance

Salaried directors, just like any other employee, are taxed through HMRC’s PAYE system. If you pay yourself a salary from a limited company, you’ll also need to pay Class 1 National Insurance contributions directly to HMRC.

How much does my company pay?

Your company will pay employers’ NICs at the standard rate: 15.05%. That’s for salaried incomes above £9,100 (per year).

How much do I need to pay?

You’ll need to pay HMRC:

13.25% on earnings above £9,880 (per year)

3.25% on earnings above £50,270 (Per year)

You can find out more on HMRC's NIC rates and thresholds at GOV.UK.

Hassle-free accounting

Working for yourself can give you much more control and tax efficiency. However, it also requires a lot more thought and effort.This article is designed to help you get a handle on your business finances, and make sure that you pay yourself as a business owner in the most tax-efficient way possible.Managing your money just got easy.Looking for someone to take all the sums and admin off your back? That’s what Ember is here for.Our expert accountants are on hand to give you on-demand advice. We’ll get stuck into the nitty-gritty, tricky tax questions, giving you one less thing to worry about.

Ellie PerkinsFreelance Writer

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