How to Pay Yourself as a Sole Trader

How you pay yourself as a sole trader can have tax implications as well as cash flow implications for your business, depending on your timings.

In this guide, I’ll show you create a way to pay yourself that is good for you and that will keep your business financially stable and avoid any unnecessary tax bills.

How to Pay Yourself as a Sole Trader

When you’re a sole trader all the money left after your business expenses and taxes belongs to you.

It’s totally up to you to choose how much you take from your business bank account and when.

As a sole trader, you can pay yourself with a simple bank transfer from your business bank account to your personal account. You’ll need to make sure you have the cash in the account to do so.

The money you pay yourself is typically called drawings.

You’ll pay sole trader tax on all your profits regardless of whether you draw it out or not, so that means your salary is not a tax-deductible expense.

If you’re using my bookkeeping spreadsheet for your bookkeeping it will automatically exclude your drawings to estimate your tax bill so you know how much to put away each month.

How to Pay Yourself as a Sole Trader

Budgeting For Your Tax

Your tax bill will continue to build up each and every time you take money so it is important to budget for your tax bill. When you look at your bank account, if you haven’t stripped out any money you owe for tax, you could end up paying yourself too much and not leaving enough behind to pay your tax bill.

I’ve put together a guide where I show you how you can make this estimation and reliably budget for your tax.

How Much Should You Pay Yourself?

The amount you should pay yourself as a sole trader depends partly on your personal and business circumstances.

There are three main options that you can choose from:

Option 1: Pay Yourself What Your Business Can Afford

If your business is in its early stages, sales may be low or you might be covering start-costs meaning there isn’t much left-over to pay you the level of salary that you may want.

Some new sole traders choose not to take any salary at all, instead treating their time as their investment.

This is fine for those that have personal savings or other forms of income. But if you do not have this, do not to leave yourself struggling to pay your bills.

If your business is new, create a start-up budget that includes a wage for yourself to give you the breathing space to get your business up and running to full capacity.

Step-by-Step Guide to Creating a Start-Up Budget for Your New Business (and free template)

Alternatively, you may want to pay yourself a salary that takes almost all the profit out of your business. If you choose this approach make sure you budget for your tax bill so there is enough left behind to clear this bill.

Option 2: Pay Yourself What You Need

Another option is to pay yourself exactly what you need to cover your personal bills like car payments, rent and food.

People tend to choose this option if:

  • They are starting a new business and want to invest their time in setting it up rather than take a salary;
  • Want to save money up in their business rather than putting it all in their account;
  • Want to defer a larger tax bill to later years;

Set up a Personal Budget to check what you need to take as a salary.

Option 3: Pay Yourself What You Would Be Paid if Your Were Employed

Another option is to pay yourself what you would be paid if you worked for someone else.

That way you be fairly remunerated for what you do and can reinvest any profits back into your business.

Whatever option you choose always have your business’ best interest at heart. There is no point destroying the thing that is paying you and all your hard work.


New Here? Learn how to set up the financial side of your business with these guides and resources:

Anita Forrest
About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.