How to pay yourself as a sole trader – UK guide to payroll and other pay options for the self employed

Last checked and updated on 21 June 2022

Self-employment can be a great way to make money and have more control over your work life. But it also comes with some extra responsibilities, like paying yourself! In this blog post, we’ll walk you through the different ways to pay yourself as a sole trader in the UK.

We’ll cover payroll options, tax implications, and other things you need to consider when setting up your payment schedule. Let’s get started!

Paying yourself as a sole trader can seem like a daunting task, but it doesn’t have to be. There are a few different options available to you, and we’ll walk through each one.

How to get set up as a sole trader

If you’re thinking of setting up as a sole trader, there’s a few things you need to do to get started. First of all, you need to register as self-employed with HMRC. You’ll also need to set up a business bank account and keep accurate records of your income and expenditure.

You can find more information on how to set up as a sole trader on the GOV.UK website.

Once you’re registered and set up, you’ll need to start thinking about how you’re going to pay yourself. This guide will give you an overview of your options and help you decide what’s best for your business.

Setting up payroll for a sole trader

The first option is to set up a payroll system. This can be done through a number of different providers, and it’s the most straightforward way to ensure that you’re paying yourself correctly. You’ll need to set up a few things before you can start using payroll, like getting a PAYE reference number from HMRC. But once you’ve got everything set up, it’s pretty easy to use.

What is sole trader payroll?

Sole trader payroll is a system where you pay yourself a salary through PAYE (Pay As You Earn). This means that you’ll deduct income tax and National Insurance from your salary before you receive it.

Is it best to use payroll software and run your own payroll, or just outsource your payroll to a third party provider?

There are pros and cons to both approaches. If you run your own payroll, you’ll have more control over the process and you’ll save money on fees. But it can be time-consuming, and you’ll need to make sure that you’re compliant with all the relevant laws and regulations.

Outsourcing your payroll can be more expensive, but it’s often more convenient and can free up your time to focus on other aspects of your business. Ultimately, the decision comes down to what makes the most sense for your business.

Taking drawings as a sole trader

Another option is to make payments directly into your personal bank account. This is a bit more complicated, as you’ll need to make sure that you’re paying the correct amount of tax on these payments. But it can be a good option if you don’t want to set up a payroll system.

What are drawings?

Drawings are basically payments that you make to yourself from your business account. They’re not considered salary or wages, so you don’t have to pay PAYE tax on them. However, you will need to declare them as income when you file your taxes.

Payroll and drawings as sole trader pay

Finally, you could also use a mixture of both methods. For example, you could set up a payroll system for your regular income, and then make additional payments into your personal bank account for things like dividends or bonuses.

Things to bear in mind

Whichever method you choose, there are a few things you need to keep in mind. First of all, you need to make sure that you’re paying the correct amount of tax.

You also need to make sure that you’re keeping accurate records of all the money you’re earning and spending. This is important for both tax purposes and for your own financial planning.

If you’re not sure where to start, there are a few resources that can help you. The government website GOV.UK has a section on self-employment, which includes information on tax and National Insurance contributions.

Consider hiring an accountant

There are also a number of accountants and bookkeepers who specialise in self-employment accounts. They can help you set up your system and make sure that you’re complying with all the relevant regulations.

Paying yourself as a sole trader doesn’t have to be complicated. There are a few different options available, and you can choose the one that best suits your needs. With a bit of planning and some help from experts, you can make sure that you’re getting the most out of your self-employment.

So what is the best way to pay yourself a wage as a sole trader?

There is no one ‘best’ way to pay yourself as a sole trader – it depends on your individual circumstances. You will need to consider factors such as your tax liability, how much you want to take out of the business, and whether you want the simplicity of a regular wage or the flexibility of drawing money when you need it.

How much tax does a sole trader pay?

Self employed income tax rates 2022/23

  • Personal allowance 0%: £0 to £12,570 zero income tax on your self employed profits
  • Basic rate 20%: £12,571 to £50,270 pay 20% tax on your self employed profits
  • Higher rate 40%: £50,001-£150,000 pay 40% tax on your self employed profits
  • Additional rate 45%: Over £150,000 pay 45% tax on your self employed profits

How to keep records of wages paid as a sole trader

If you’re paying yourself a wage, it’s important to keep accurate records. You’ll need to record the date and amount of each payment, as well as any tax and National Insurance deductions.

You should also keep records of any other money that you receive from your business, such as dividends or bonuses. This will help you to stay on top of your finances and make sure you’re paying the correct amount of tax.

Frequently asked questions

How many times per year do self employed people pay tax and national insurance?

Income tax is usually paid once a year, but you may have to make ‘payments on account’ if you owe more than £1000 in tax.

At what time of year do self employed people pay tax?

The tax return filing deadline for paper returns is 31 October. If you file your return online, you have until midnight on 31 January to submit it.

What is the difference between a sole trader and self employed?

A sole trader is someone who owns an unincorporated business by themselves. A self employed person is someone who works for themselves.

What is the difference between a limited company and a sole trader?

A limited company is a business structure where the liability of the owners is limited to their investment in the company. A sole trader is someone who owns an unincorporated business by themselves.

How do I set up as a self employed person?

There is no legal requirement to register as self employed, but you will need to do so if you want to claim certain benefits or tax allowances. To register as self employed, you will need to contact HMRC.

Does a sole trader pay VAT?

Sole traders with a turnover of more than £85,000 must register for VAT and charge it on their sales.

How do I pay myself as a sole trader?

There is no one ‘best’ way to pay yourself as a sole trader – it depends on your individual circumstances. You will need to consider factors such as your tax liability, how much you want to take out of the business, and whether you want the simplicity of a regular wage or the flexibility of drawing money when you need it.

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Important – The information provided in our articles is intended to be for general purpose use only, and not advice for you or your business. We strive to publish accurate information, but encourage you to fact-check and seek expert guidance. We recommend that you always speak to a qualified professional to get advice about how to operate your business under your specific requirements and circumstances.