How sole traders pay themselves
As a sole trader, you’re not financially separated from your business. So, you can simply pay yourself money at any point from your business profits, which is called a ‘drawing’. The profit is the surplus from the income generated after allowable expenses.
It’s important to keep a record of the money paid to yourself for your Self Assessment tax return, income tax and national insurance. And as these aren’t wages, they’re not deductible when you’re working out annual business profits.
When deciding how much to pay yourself, it’s important to keep enough money in the business to cover costs and expenses, and to retain enough funds to cover the tax on profits payable each year.
While it’s possible to dip into your business account whenever you want as a sole trader, there are benefits to setting a regular date for paying yourself. This makes it easier to see how your business is performing, and you can set dates to ensure you cover outgoings like rent or larger direct debits. This is particularly helpful to avoid the risk of accidentally spending on other things earlier in the month, and finding yourself short on the day the mortgage or council tax is due.
How to budget for your wages as a sole trader
There’s a reason budgeting is so important when you’re self-employed. Life can be unpredictable, especially when you rely on clients for your income. And even a basic budget plan will help you cope more easily with issues, and lower the stress and worry of working for yourself.
As a sole trader, once your expenses and tax costs are covered, you may be tempted to take the rest of the business profits as earnings. But it’s always a good idea to retain some money as a buffer, both for yourself and the business. Budgeting to save an emergency fund can cover leaner times, with recommendations of between 3-6 months of income as a starting point. But even small amounts can make a huge difference in an emergency.
And the earlier you plan for the future, the better your situation is likely to be. That’s particularly important for pensions, as the self-employed miss out on employer pension contributions and automatic enrolment. So, using some of your business profits to invest in a personal pension will pay off in the future.
Working out your personal budget and expenses will also help you know how much income your business needs to provide each week or month. And what level of clients or customers you require to meet or exceed that amount.
Looking for more advice? We can help.
Have you ever had a business idea that needed significant capital to start? Angel investors offer an alternative to business loans or venture capital (VC) funding...
In this guide, we run through the key things you need to know about IR35 as a self-employed professional, including the difference between 'inside' and 'outside' ...
Even the most resilient self-employed professionals can be thrown by unexpected challenges, including power cuts, internet outages, office thefts and more. Find o...
