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As a sole trader, you work for yourself and keep everything your business earns. Legally speaking, you and your business are one and the same - there’s no separation between the two.
On the surface, that sounds simple. In practice, it often raises a few important questions, such as:
- How much should you pay yourself?
- How do you handle tax when nothing is taken automatically?
- What records do you actually need to keep?
It’s common to wonder why you even need to “pay yourself” at all. After all, if the money is already yours, surely you can just take it when you need it.
The reality becomes clearer when Self Assessment comes around. HMRC expects accurate records of every transaction linked to your business, including any money you take out for personal use. As a sole trader, paying yourself means transferring money from your business account to your personal account as drawings — and those drawings must be recorded properly, as they directly affect your cash flow and reported profits.
Your Income Tax and National Insurance contributions are calculated on those profits. Put simply, the higher your profit, the more tax you’ll owe — which is why understanding what to take, what to set aside, and what you can claim as expenses really matters.
Getting this right can make a huge difference to both your peace of mind and your finances.
If you want clarity on drawings, expenses, and preparing for Self Assessment, our accounting experts can help you put a simple, reliable system in place from day one.
Book a call with our team to get tailored advice for your sole trader business.
How Do I Pay Myself From My Business?
The first step is to open your own business bank account. Keeping your personal and business finances separate is important for many reasons – and it isn’t something you can do without.
Once you’ve opened a business bank account, you can simply transfer money from this account to pay yourself. Remember to keep a record of these drawings, along with any other business incomings and outgoings.
Take care of your books by keeping them neat and up-to-date, and they’ll take care of you once tax season comes around.
How Do I Report My Profits To HMRC?
As a sole trader, you’ll need to complete a Self Assessment every year to declare your business profits. In this case, your profits are calculated by subtracting allowable business expenses from your total annual income. For this reason, it’s important to check you’re claiming everything you possibly can. The lower your final profit margin is, the less tax you’ll have to pay.
Keep in mind that expenses need to be “wholly and exclusively used for business purposes”. Any personal expenditures aren’t going to count against your total.
How Much Should I Set Aside To Pay My Taxes?
While lower profits equal lower taxes, the reverse is also true. The higher the reported profit, the higher your tax liability.
Unlike PAYE, where tax is deducted before you get the income, self-employment means you pay what’s due at the end of the year. The best way to prepare for this is to set aside a percentage of each payment you receive for tax. That way, you’re guaranteed to have enough money to cover your Self-Assessment tax bill.
Here’s our recommended scale to show exactly how much you should set aside for annual Income Tax and National Insurance:
For example, if your business has an annual profit of £80,000, then you should set aside £32,000.
While you might not pay that much, it’s better to have too much set aside than not enough. And if you end up paying less, you’ll have some spare cash to invest back into your business.
Do I Need To Declare My Earnings From Employment Or Dividends?
While your business is still in fledgling mode, you might be working for an employer while you get your hustle going. This is perfectly legal – as long as you declare it.
If you’re getting a wage from an employer, you need to mention this in your annual Self Assessment. The good news is that you won’t have to pay Income Tax and National Insurance. That’s because this is usually already deducted through the Pay As You Earn (PAYE) scheme.
Your employer will give you a P60 Form at the end of the tax year, which details your income and taxes paid. Include the income tax that has already been deducted from your employer on your Self Assessment. HMRC will calculate any additional Income Tax and National Insurance due from your self-employment. Don’t worry – you won’t be double taxed.
How And When Do I Have To Pay HMRC?
Your Self Assessment should be filed online, and any taxes due must be paid to HMRC before 31 January after the end of the tax year (Note: The tax year runs from 6 April to 5 April the following year).
It’s always better to get in early to avoid any late penalties (which start from £100). If you’re looking for helpful tips to get a jump on things, you can check out our Self Assessment FAQs guide.
If your tax bill is more than £1,000 for the year, you’ll need to make ‘Payment on Account’. Basically, this means you need to pay forward half of your total expected tax bill for the following year. This might seem unfair, but its HMRC’s way of making sure that taxes are paid regularly.
The good news? You can do this in instalments. There are two payments made towards the Payment on Account. The first must be made by 31st January and the second payment is due on (or before) the 31st July each year.
Want Some Help With That?
As a sole trader, filing your own Self Assessment for the first time can feel like a nightmare.
What expenses you can claim, maintaining your books, making sure you pay your taxes on time – it’s overwhelming.
Addition combines accounting automation with a team of financial experts, offering you the best of both. Our app makes logging expenses simple and quick. You’ll also get reminders for upcoming tax deadlines, along with real-time estimates of how much you need to pay. To find out more about Addition, book a call with our team now.
Frequently Asked Questions: Paying Yourself as a Sole Trader
Do I have to pay myself a salary as a sole trader?
No. Sole traders do not take a salary in the same way employees or limited company directors do. Instead, you pay yourself by taking drawings, which means transferring money from your business bank account to your personal account. These payments are not classed as wages and are not taxed at the point you take them.
Are drawings classed as an expense?
No. Drawings are not a business expense and do not reduce your taxable profit. They are simply a way of taking money out of your business for personal use. Your tax bill is based on your total business profit, not how much money you withdraw.
How often can I take drawings from my business?
You can take drawings as often as you like, provided your business has enough cash to cover them. Some sole traders pay themselves weekly or monthly, while others take money as and when they need it. The most important thing is to keep clear records of every withdrawal.
Should I keep a separate business bank account?
Yes. While it is not a legal requirement for sole traders, having a dedicated business bank account makes it far easier to track income, expenses, and drawings. It also reduces the risk of mistakes when preparing your Self Assessment and helps you understand your true cash flow.
How much should I set aside for tax as a sole trader?
A common rule of thumb is to set aside 25–40% of your profits to cover Income Tax and National Insurance, depending on how much you earn. Setting aside money regularly ensures you are not caught short when your Self Assessment bill is due.
Do I pay tax on all the money my business receives?
No. You only pay tax on your profit, not your total income. Profit is calculated by subtracting allowable business expenses from your income. This is why claiming all legitimate expenses is so important — it can significantly reduce your tax bill.
What records do I need to keep as a sole trader?
You should keep records of:
- All business income
- All business expenses
- Any drawings you take
- Invoices and receipts
- Bank statements
These records must usually be kept for at least five years after the 31 January submission deadline.
Do I need to declare other income, like employment or dividends?
Yes. If you earn income from employment, dividends, or other sources alongside your self-employment, this must be declared on your Self Assessment. Any tax already paid through PAYE will be taken into account, so you won’t be taxed twice.
What happens if I miss the Self Assessment deadline?
If you miss the 31 January deadline, you’ll usually receive an automatic £100 late filing penalty, even if you don’t owe any tax. Additional penalties and interest can apply the longer the delay continues, which is why early preparation is key.
Can I get help managing all of this?
Absolutely. Many sole traders use accounting software alongside expert support to keep everything organised, track expenses, and stay on top of tax deadlines. Having the right system in place can remove a lot of stress and help you avoid costly mistakes.
