One of the most common questions we hear from small business owners is: “How do I pay myself properly?”
Whether you’re a sole trader or the director of a limited company, it’s important to understand the most tax-efficient and compliant way to take income from your business.
In this guide, we’ll walk you through how business owners pay themselves in the UK, the key differences between drawings, salary, and dividends, and what to consider to stay on the right side of HMRC.
Why It Matters How You Pay Yourself
Getting paid isn’t as straightforward as transferring money from your business bank account to your personal one.
Choosing the right method affects:
- How much tax and National Insurance you pay
- Your eligibility for benefits or a mortgage
- Your business’s cash flow and tax deductions
Understanding the rules for your business structure is key to avoiding mistakes and making the most of your income.
Download our free Taxes Made Simple guide which breaks down all you need to know about taxes as a UK business owner.
Paying Yourself as a Sole Trader
As a sole trader, you are the business. There’s no legal distinction between personal and business income, which simplifies things, but there are still rules to follow.
You report total business profit on your Self Assessment tax return each year.
HMRC then calculates:
- Income Tax (based on your total annual profit)
- Class 2 and Class 4 National Insurance
How Much Should You Pay Yourself As A Sole Trader?
Let’s say you’re a sole trader with £40,000 in annual business profit (after all allowable business expenses).
You don’t “pay yourself” a salary, you simply draw money from the business as needed.
But your entire £40,000 profit is taxable income, whether you withdraw it or leave it in your business account.
What Taxes You’ll Pay (25/26 rates):
- Tax-free allowance: £12,570
- Taxable income: £27,430 (from £40,000 – £12,570)
- Income Tax (20%) on £27,430 = £5,486
- National Insurance:
- Class 2 = £179.40 (flat rate)
- Class 4 = £2,468.70 (9% of £27,430)
Total Tax & NI: £8,134.10
Approximate Take-Home Pay:
- Profit: £40,000
- Minus tax & NI: £8,134.10
- Approximate take-home pay: £31,865.90
Paying Yourself as a Limited Company Director
A limited company is a separate legal entity, which means your income must be drawn through formal channels.
As a Director, you’re both an employee and a shareholder, so you can pay yourself through:
- Salary (as an employee)
- Dividends (as a shareholder)
- Director’s loan (with strict rules)
Salary As a company director
Directors can take a salary through PAYE.
This is a legitimate business expense and reduces your company’s Corporation Tax bill.
Advantages:
- Builds up qualifying years for state pension
- Allows personal pension contributions
- Easier to demonstrate income for mortgages
Most directors set their salary at or just above the National Insurance threshold to avoid employee and employer NI while still benefiting from pension credits.
Dividends as a company director
After the company pays Corporation Tax, remaining profits can be distributed as dividends to shareholders (typically yourself).
Advantages:
- Lower tax rates than salary
- No National Insurance contributions
You must:
- Hold a board meeting and issue a dividend voucher
- Only pay dividends from retained profit (not just money in the bank)
Director’s Loan
If you take more money out than you’ve put in or earned, it’s considered a director’s loan. If not repaid quickly, it can result in:
- Additional Corporation Tax (Section 455 charge)
- Benefit-in-kind reporting
This is best avoided unless you fully understand the implications.
How Much Should You Pay Yourself As A Limited Company Director?
Let’s say you’re the sole director and only shareholder of your limited company, and the business is making enough profit to support your income.
To keep things tax-efficient, many directors use a mix of salary and dividends.
Here’s an example using figures based on 25/26 tax rates:
1. Salary: £12,570
- Income Tax: £0 (within Personal Allowance)
- Employee NI: £0 (below threshold)
- Take-home: £12,570
2. Dividends: £33,730
- Dividend Allowance: £500 (tax-free)
- Taxable Dividends: £33,230
- Dividend Tax (8.75%): £2,905.13
- Take-home from dividends: £33,730 – £2,905.13 = £30,824.87
Take Home Income:
- Salary: £12,570
- Dividends (after tax): £30,824.87
- Total Take Home Income: £43,394.87
This setup helps keep your personal tax low, makes use of available allowances, and is fully compliant with HMRC rules.
NOTE: Salary is a business expense, so it reduces your company’s profit and the amount of Corporation Tax the business pays.
On the other hand, dividends are paid from profits after Corporation Tax is deducted.
Tips to Paying Yourself
There’s no one-size-fits-all answer, but key tips include:
- Don’t take more than the business can afford
- Set a personal monthly “salary” to help budgeting
- Keep funds in the business for tax bills and emergencies
Your ideal income mix depends on:
- Personal tax bracket
- Business profits
- Whether you need pension contributions or mortgage support
We can help structure this in the most efficient way for you.
Final Thoughts: What’s Best for You and Your Business?
Paying yourself properly is more than just getting money into your account, it’s about planning, compliance, and peace of mind.
Whether you’re a sole trader or a limited company director, understanding your options can help you reduce tax, protect your business, and build sustainable income.
If you have any questions or need some guidance, get in touch today for a friendly, no-obligation chat.
