One of the most common questions from new business owners is: how do I pay myself? The answer depends on whether you are a sole trader or run a limited company. This article is general information. Rates and thresholds change, so check GOV.UK and ask an accountant to confirm what is best for you.
If you are a sole trader
You do not receive a salary. You take drawings: money you move from the business account to your personal account whenever you like. Two important points:
- Drawings are not an expense. You pay income tax and Class 4 National Insurance on your profit, whatever you draw.
- Set tax aside. Put away a share of every payment so the Self Assessment bill, and the payments on account that follow, are covered.
Use our self-employed tax calculator to estimate what to set aside.
If you run a limited company
The company and you are separate, so money has to leave in a proper way. The usual routes are:
- Salary. Paid through PAYE. It is a company expense, and may attract National Insurance depending on the amount.
- Dividends. Paid from profits after corporation tax. You must have enough retained profit to pay them lawfully, and you should keep a dividend voucher and board minutes.
- Expenses and mileage that you have paid personally for the company, reimbursed with receipts.
- Director’s loan. Taking money that is not salary, dividend or an expense creates a loan from the company. If it is still unpaid nine months after the company’s year end, an extra tax charge can arise.
Many directors take a modest salary and top up with dividends, because the combination can be tax-efficient. The best mix changes every tax year, so an accountant can help each April.
Common mistakes
- Treating the company bank account as a personal one.
- Paying dividends when there are no profits to cover them.
- Forgetting to set aside tax.
- Not recording drawings, or a director’s loan, in the books.
A simple routine
- Decide a regular amount to draw or pay each month.
- Move a fixed percentage of income to a tax savings pot.
- Record every movement so the books always show what you have taken.
- Review quarterly against your profit and loss.
How AvrioBooks helps
Record transfers between your accounts and post drawings or director’s loan entries with manual journals, so the books stay accurate. Your profit and loss and balance sheet show what the business earned and what you have taken out. See sole trader or limited company.
Frequently asked questions
How does a sole trader pay themselves?
By taking drawings from the business. Drawings are not an expense, and you pay tax on your profit however much you draw.
How do company directors usually get paid?
Commonly with a small salary through PAYE plus dividends paid from profits after corporation tax. An accountant can advise on the best mix.
What is a director’s loan?
Money you take from the company that is not salary, a dividend or a reimbursed expense. If it is not repaid in time, an extra tax charge can apply.
How much tax should I set aside?
It depends on your profit. Many people set aside a fixed percentage of every payment. Use a tax calculator or ask your accountant.
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