How Do I Pay Myself from My Small Business?

At Towerstone Accountants we provide specialist small business accountancy services for owners, directors, and growing businesses across the UK. We created this webpage for small business owners who want clear guidance on managing finances, meeting tax obligations, and making informed decisions without jargon. Our aim is to help you stay compliant, improve cash flow, and build a more resilient business.

This is one of the most important questions any small business owner can ask, and it is also one of the areas where I see the most confusion, anxiety, and costly mistakes. How you pay yourself affects your personal income, your tax bill, your cash flow, and in some cases even your legal position. Yet many people are never properly shown how it works. They muddle through, take money when they need it, and hope it will all balance out later.

In my experience as a chartered accountant running my own firm, paying yourself correctly is not about being clever or aggressive with tax. It is about understanding the structure of your business, knowing what is allowed, and creating a system that is sustainable, compliant, and predictable. When that system is in place, stress reduces dramatically.

In this article, I want to explain clearly how you can pay yourself from a small business in the UK, how the rules differ depending on your business structure, what the tax implications are, and how to avoid the most common pitfalls. This is written from real world experience working with sole traders, limited company directors, and growing businesses at different stages.

Why Paying Yourself Properly Matters More Than People Think

Many small business owners treat paying themselves as an afterthought. They focus on sales, clients, and survival first, and worry about personal income later. While that instinct is understandable, it often leads to problems.

Paying yourself properly matters because:

• It determines how much tax you pay

• It affects your personal financial stability

• It impacts business cash flow

• It influences future decisions like mortgages or loans

Without a clear method, money becomes blurred between business and personal life, which increases stress and risk.

The First Thing to Understand Is Your Business Structure

How you pay yourself depends entirely on how your business is set up. In the UK, most small businesses fall into one of two categories:

• Sole trader

• Limited company

The rules, terminology, and tax treatment are very different for each. This is where confusion often starts, because advice that applies to one structure is frequently misapplied to the other.

Paying Yourself as a Sole Trader

If you are a sole trader, your business and you are legally the same person. There is no separation between business money and personal money in the eyes of the law.

This means there is no such thing as a salary or wages for a sole trader.

Instead, you pay yourself through what are known as drawings.

What Drawings Actually Are

Drawings are simply money you take out of the business for personal use. They are not an expense. They do not reduce your taxable profit.

This is one of the most important points to understand.

As a sole trader:

• You pay tax on your business profit

• Not on the amount you withdraw

You could leave all the money in the business and still owe tax. Or you could take everything out and still owe the same tax.

This often surprises people.

How to Take Drawings in Practice

In practical terms, paying yourself as a sole trader usually involves:

• Transferring money from your business account to your personal account

• Or withdrawing cash for personal use

It is good practice to:

• Use a separate business bank account

• Label transfers clearly

• Keep a rough rhythm to drawings

While there is no legal requirement for fixed monthly amounts, having consistency helps with budgeting and discipline.

Tax Implications for Sole Traders

As a sole trader, you pay:

• Income Tax

• Class 2 National Insurance

• Class 4 National Insurance

These are calculated through your Self Assessment tax return, based on profit.

Because tax is not deducted at source, it is your responsibility to set money aside.

Many sole traders get into trouble because they pay themselves freely without reserving funds for tax.

A sensible approach is to regularly set aside a percentage of income into a separate savings account for tax.

Common Sole Trader Mistakes When Paying Themselves

Some of the most common issues I see include:

• Treating drawings as an expense

• Spending money without considering tax

• Using the business account like a personal account

• Not keeping enough aside for January payments

These are not signs of irresponsibility. They are signs of not being shown how the system works.

Paying Yourself From a Limited Company

Limited companies are very different.

A limited company is a separate legal entity. The money in the company belongs to the company, not to you personally, even if you are the only director and shareholder.

This distinction is crucial.

Taking money out incorrectly can cause tax problems or legal issues.

The Main Ways to Pay Yourself From a Limited Company

Most small company directors pay themselves through a combination of:

• Salary

• Dividends

There are other ways, but these are the core methods.

Each has different tax implications and rules.

Paying Yourself a Salary

A salary is paid through payroll, just like an employee.

This involves:

• Registering for PAYE

• Running payroll

• Reporting to HMRC

• Issuing payslips

A salary is a business expense, which means it reduces company profit and corporation tax.

However, salaries are subject to:

• Income Tax

• National Insurance

Both employee and employer National Insurance may apply, depending on the level of salary.

Many small company directors choose a salary level that is tax efficient rather than high.

Why Directors Often Take a Low Salary

A common approach is to take a salary around the personal allowance or National Insurance thresholds.

This can:

• Use up personal allowances

• Minimise National Insurance

• Keep things compliant

The exact figure can change depending on tax year and personal circumstances, so this should be reviewed regularly.

Paying Yourself Dividends

Dividends are payments made to shareholders from company profits after corporation tax.

They are not an expense. They are a distribution of profit.

To pay dividends properly, you must:

• Have sufficient post tax profits

• Declare the dividend formally

• Record it correctly

Dividends are taxed differently from salary and are usually more tax efficient at lower levels, but they still attract tax above allowances.

Why Dividends Cannot Be Paid Whenever You Like

This is a very common misunderstanding.

You cannot pay dividends if the company has no profits. Doing so can create an illegal dividend, which may need to be repaid.

This is why proper accounts and bookkeeping matter.

Combining Salary and Dividends

For many small business owners, the most efficient structure is a combination of:

• A modest salary

• Top up income with dividends

This balances tax efficiency with compliance and stability.

However, the right mix depends on:

• Company profits

• Other income

• Future plans

• Risk tolerance

There is no universal answer.

Director’s Loan Accounts and Paying Yourself

Another area of confusion is the director’s loan account.

This tracks money:

• You lend to the company

• The company lends to you

If you take money out that is not salary or dividends, it usually goes through the director’s loan account.

This is not automatically wrong, but it must be monitored carefully.

Overdrawn loan accounts can trigger additional tax charges if not cleared in time.

Paying Yourself Irregularly or When Cash Allows

Many business owners do not pay themselves a fixed amount each month, especially in early stages.

That is fine, but it needs to be controlled.

Irregular payments should still be:

• Planned

• Recorded

• Reviewed

Cash flow must always come first. Paying yourself too much at the wrong time can put the business at risk.

How Much Should You Pay Yourself

This is often the hardest question.

The answer depends on:

• Business profitability

• Cash flow stability

• Personal financial needs

• Tax position

A good starting point is to separate:

• What you need personally

• What the business can afford

These are not always the same thing.

The Emotional Side of Paying Yourself

Many small business owners feel guilt about paying themselves. Others feel pressure to take as much as possible.

Both extremes cause problems.

Paying yourself fairly and consistently is not selfish. It is sustainable.

If you do not look after your own finances, the business will eventually suffer too.

Why Using an Accountant Helps Here

Paying yourself is one of the areas where professional advice pays for itself.

An accountant can help you:

• Choose the right structure

• Set up payroll correctly

• Decide on salary and dividend levels

• Avoid costly mistakes

• Plan for tax

This is not about maximising tax avoidance. It is about making informed, compliant decisions.

Common Mistakes Across All Business Types

Across both sole traders and limited companies, I regularly see:

• People taking money without understanding consequences

• No separation between business and personal finances

• Ignoring tax until it becomes urgent

• Paying themselves inconsistently and reactively

These patterns create stress and instability.

Building a Simple System for Paying Yourself

A good system does not need to be complicated.

It should include:

• Clear method of payment

• Regular review of cash flow

• Money set aside for tax

• Records kept properly

Once a system is in place, paying yourself becomes routine rather than stressful.

Thinking Ahead and Adjusting Over Time

How you pay yourself should evolve as your business grows.

What works in year one may not work in year three.

Regular reviews ensure:

• You are not underpaying yourself unnecessarily

• You are not draining the business

• You are staying tax efficient

This is an ongoing process, not a one off decision.

Final Thoughts

Paying yourself from your small business is not just about taking money out. It is about understanding the structure you operate under, respecting the rules that apply, and building a system that supports both your business and your personal life.

Whether you are a sole trader taking drawings or a company director balancing salary and dividends, clarity is key. When you understand how it works, fear and guesswork disappear.

If you are unsure, that is not a failure. It is a sign you care about doing things properly. Getting this right early can save you money, stress, and difficult conversations later.

A small business should support your life, not constantly put it under pressure. Paying yourself properly is a big part of making that happen.

You may also find our guidance on How do I know if I am paying myself tax efficiently and Do I need to do a Self Assessment as a small business owner useful when exploring related small business questions. For a broader range of practical advice, you can visit our small business guidance hub.