Should I pay myself a salary or draw money as a sole trader?

If you are self employed and run your business as a sole trader, you might wonder how best to pay yourself. Unlike company directors, sole traders do not take a salary in the traditional sense, nor do they pay themselves through PAYE. Instead, they take drawings, which are withdrawals from the business’s profits.

Understanding the difference between drawings and salary is essential for managing your tax correctly and avoiding confusion when completing your Self Assessment return. This article explains how sole traders can pay themselves, what the tax implications are, and how to manage drawings effectively.

The difference between a salary and drawings

A salary is a fixed payment made to an employee or company director through PAYE, with Income Tax and National Insurance deducted before payment. A drawing, on the other hand, is money you take from your business profits as a sole trader.

As a sole trader, you and your business are legally the same entity. This means you do not pay yourself a salary or wages. Any money you withdraw is treated as taking your profit, not as a separate expense.

In short:

• Sole traders take drawings.

• Limited company owners can take a salary (and often dividends).

How drawings work

Drawings are simply the money you take out of your business bank account for personal use. You can withdraw funds at any time and in any amount, provided your business has the cash available.

However, it is important to remember that drawings are not an expense for tax purposes. They do not reduce your taxable profit because they are taken from your profit, not before it.

For example:

• If your business earns £50,000 and you withdraw £30,000 as drawings, you still pay tax on the full £50,000 profit, not £20,000.

You are taxed on your business’s total profit after allowable expenses, regardless of how much money you actually withdraw.

How tax works for sole traders

As a sole trader, you pay tax through Self Assessment based on your annual business profit. You must register with HMRC and submit a tax return each year.

Your taxable profit is calculated as:
Total business income Allowable business expenses = Taxable profit

You then pay:

• Income Tax on your profits above the personal allowance (£12,570 for 2024/25).

• Class 2 National Insurance if profits exceed £12,570 (£3.45 per week).

• Class 4 National Insurance on profits between £12,570 and £50,270 at 9%, and 2% above that.

The amount you withdraw as drawings does not affect these calculations. Tax is based solely on the profit your business generates, not the amount you take out.

Why you cannot pay yourself a salary as a sole trader

Sole traders cannot be employees of their own business, as they are not legally separate from it. Paying yourself a salary would mean trying to employ yourself, which is not possible under UK tax law.

If you were to treat drawings as a salary and record them as an expense, you would be incorrectly reducing your taxable profit. HMRC could disallow these deductions and require you to pay additional tax.

Only a limited company can pay a salary through PAYE because the company is a separate legal entity from its owner.

How much should you take as drawings?

There are no legal limits on how much you can withdraw as a sole trader, but it is wise to plan carefully to ensure your business remains financially stable and you can cover future tax bills.

Many sole traders set aside funds for:

• Tax and National Insurance payments.

• Business expenses and cash flow.

• Emergency reserves.

A good approach is to withdraw money regularly for personal living costs while keeping enough in your business to cover ongoing expenses and future tax liabilities.

Setting up a drawings account

To track your withdrawals, it’s helpful to maintain a drawings account within your bookkeeping system. This shows:

• The total amount you have withdrawn during the year.

• How much profit remains in the business.

• The difference between business and personal finances.

Keeping these records also helps you avoid using your business account like a personal bank account, which can make accounting and tax filing much simpler.

When it might be better to set up a limited company

As your business grows, you may consider forming a limited company. This structure allows you to pay yourself a combination of salary and dividends, which can be more tax-efficient once profits reach a certain level.

In a limited company:

• You are both a shareholder and an employee.

• The company pays Corporation Tax on its profits.

• You can take a small salary (through PAYE) and the rest as dividends, which are taxed at lower rates than income tax.

However, operating a company involves more administration, stricter reporting requirements, and higher accountancy costs. An accountant can help you compare whether remaining a sole trader or incorporating is more beneficial.

Managing tax on drawings

Because tax is based on your profit, not your drawings, it is important to budget for your tax bill. Setting aside around 20 30% of your profits in a separate account is a good rule of thumb to ensure you can pay your tax when it’s due.

You must also remember that Self Assessment tax payments are made twice a year:

• 31 January: For the previous tax year and your first payment on account for the current year.

• 31 July: For your second payment on account.

Planning ahead ensures that drawings do not leave you short when tax deadlines arrive.

Common mistakes to avoid

• Treating drawings as expenses: Drawings do not reduce your taxable profit.

• Failing to set aside tax: Withdrawals can leave you short if you forget to reserve money for HMRC.

• Mixing personal and business spending: Always use separate accounts for business and personal use.

• Taking too much too soon: Keep enough funds in the business for cash flow stability.

How accountants can help

An accountant can:

• Help you calculate the right level of drawings to maintain cash flow.

• Estimate your upcoming tax bill and advise how much to set aside.

• Manage bookkeeping and ensure your Self Assessment is accurate.

• Advise on whether incorporating your business would reduce your tax burden.

Professional guidance ensures you pay yourself efficiently and stay compliant with HMRC rules.

The bottom line

As a sole trader, you cannot pay yourself a salary in the traditional sense—you take drawings instead. Your tax is based on the business’s profit, not the money you withdraw.

Paying yourself through regular drawings keeps things simple, but you must plan ahead for tax and National Insurance. By keeping accurate records and seeking professional advice, you can ensure your business remains financially healthy and your income is managed efficiently.