How Do I Pay Myself from My Small Business?

Paying yourself from your small business depends on your setup. Discover how to withdraw money correctly and tax efficiently as a sole trader or company director.

Introduction

One of the most common questions small business owners ask is, “What’s the best way to pay myself?” The answer depends on how your business is structured — whether you are a sole trader, a partner in a partnership, or a director of a limited company.

Paying yourself correctly is not only about getting money from your business; it is also about doing it in a way that is tax-efficient and compliant with HMRC rules. This article explains how small business owners can pay themselves, what to avoid, and how an accountant can help you find the most effective approach.

1. Paying Yourself as a Sole Trader

If you operate as a sole trader, there is no legal distinction between you and your business. You do not pay yourself a salary or wages in the same way an employee does. Instead, you simply take money from your business as drawings.

How It Works

  • You record all business income and expenses throughout the year.

  • Your profit (income minus expenses) is considered your personal income.

  • You can withdraw funds from your business bank account whenever you like — these are called drawings.

You do not pay Income Tax or National Insurance at the point of withdrawal. Instead, you pay tax on your total profit when you file your Self Assessment tax return at the end of the tax year.

Tax You Will Pay

As a sole trader, you are responsible for:

  • Income Tax: Based on your total annual profit after allowable expenses.

  • Class 2 and Class 4 National Insurance contributions: Depending on your earnings.

The key is to set aside money throughout the year to cover your tax bill rather than spending all your drawings.

Example

Emma runs a small photography business as a sole trader. Her annual profit is £30,000. She withdraws £2,000 each month as drawings, but these payments are not taxed individually. When she submits her Self Assessment, she pays Income Tax and National Insurance based on her £30,000 profit.

2. Paying Yourself as a Partner in a Partnership

If your small business operates as a partnership, you and your partners share the profits according to your partnership agreement.

Each partner’s share of the profit is treated as personal income and taxed through their Self Assessment. Like sole traders, partners can withdraw money from the business at any time, but tax is based on profit, not withdrawals.

Your partnership agreement should clearly outline how profits are divided, when partners can take drawings, and how expenses are handled.

Example

Two partners, Sarah and Jake, run a plumbing business with profits of £80,000. Their partnership agreement splits profits 50/50. Each partner reports £40,000 as income on their tax return, regardless of how much they actually withdrew during the year.

3. Paying Yourself as a Limited Company Director

If your small business is a limited company, it is a separate legal entity. The company’s money belongs to the business, not directly to you, so there are specific ways to withdraw funds.

You can pay yourself through:

  1. A salary.

  2. Dividends.

  3. Reimbursement for business expenses.

  4. Director’s loans (when structured correctly).

Paying Yourself a Salary

As a company director, you can pay yourself a salary through the company’s PAYE (Pay As You Earn) system. You become an employee of your company and receive payslips and tax deductions like any other worker.

A common strategy is to pay yourself a salary up to the Personal Allowance threshold (£12,570 for 2024 25). This means you will not pay Income Tax on that portion, though small National Insurance contributions may apply.

Taking Dividends

Dividends are payments made to shareholders from the company’s post-tax profits. Once the company has paid Corporation Tax, remaining profits can be distributed as dividends.

For the 2024 25 tax year:

  • The first £500 of dividends is tax-free.

  • Dividends above this are taxed at:

    • 8.75% for basic rate taxpayers.

    • 33.75% for higher rate taxpayers.

    • 39.35% for additional rate taxpayers.

Many small business owners combine a small salary with dividends to keep taxes low while maintaining access to National Insurance benefits.

Reimbursing Business Expenses

If you personally pay for business expenses — such as travel, tools, or equipment — the company can reimburse you tax-free, as long as the costs are wholly and exclusively for business purposes.

Director’s Loan Account

You may lend money to or borrow from your company using a Director’s Loan Account (DLA).

  • If the company owes you money, you can withdraw it tax-free.

  • If you owe the company money, it must be repaid within nine months of the year-end to avoid a tax charge.

It is important to keep accurate records of all transactions to avoid issues with HMRC.

4. Which Option Is Most Tax Efficient?

The most tax-efficient method depends on your business structure and income level.

  • Sole traders and partners: Pay tax on total profits, so drawings do not affect tax liability.

  • Limited company directors: Combining a small salary with dividends often results in the lowest tax bill because dividends are taxed at lower rates and do not attract National Insurance.

An accountant can calculate the most efficient combination for your specific situation and ensure all payments are compliant with tax rules.

5. Avoiding Common Mistakes

Small business owners sometimes run into problems by confusing business and personal finances. To stay compliant:

  • Always keep a separate business bank account.

  • Record every payment and withdrawal accurately.

  • Avoid withdrawing more than the company can afford.

  • Keep up with PAYE and dividend paperwork for HMRC.

Failing to maintain proper records can result in unexpected tax bills or HMRC penalties.

Example Scenario

David runs a small marketing agency as a limited company. His accountant advises him to take a salary of £12,570 (within the personal allowance limit) and £30,000 in dividends.

This combination allows David to minimise Income Tax and National Insurance while ensuring the company stays compliant. His accountant also helps him file payroll and dividend paperwork each month.

The Role of an Accountant

An accountant can provide invaluable support by:

  • Advising on the most tax-efficient way to pay yourself.

  • Setting up payroll and handling PAYE submissions.

  • Calculating dividends correctly and preparing documentation.

  • Managing company accounts and ensuring HMRC compliance.

  • Helping with budgeting and cash flow to maintain a sustainable income.

With professional guidance, you can pay yourself confidently while maximising your earnings and minimising your tax burden.

Conclusion

How you pay yourself as a small business owner depends on your business structure. Sole traders and partners draw money directly from profits, while limited company directors can use a combination of salary and dividends for tax efficiency.

By keeping accurate records, understanding your tax obligations, and working with an accountant, you can ensure you are paid properly while staying compliant with HMRC. A well-structured payment plan not only helps you manage your finances but also supports the long-term health of your business.