How to pay yourself when self-employed

If you’re wondering what’s the best way to pay yourself when self-employed or as a business owner, you’ve come to the right place.

This article has everything you need to know about how to pay yourself when self-employed, including how to work out the tax and national insurance you owe, with plenty of useful links to help you calculate expenses and become a boss at bookkeeping.

We’ve even prepared an 8-step guide to help you out – it’s free to download!

How much to set aside for UK taxes when self-employed

If you’re self-employed, you need to register as self-employed with HMRC.

You’ll then need to pay taxes and National Insurance Contributions (NIC) to HMRC after completing your annual self-assessment tax return.

After all, no one wants the nasty surprise of a tax bill that’s not budgeted for.

So to avoid this, it’s highly recommended you set money aside each month in a savings account for the taxes you’ll owe. (Tip: you’ll also earn interest on this money while it’s in savings).

How much to set aside for tax

• For annual profits of up to £50,000, you should set aside 25% of your earnings for tax 
• For annual profits of up to £100,000, you should set aside 40% of your earnings for tax
• For annual profits of £100,000 or more, set aside 45% of your earnings for tax

Budget for ‘payments on account’

As well as paying the ‘balancing payment‘ for tax owed for the financial year 2021/22 (as an example), you must also make ‘payments on account‘ for the year ahead too (2022/23 in this example).

‘Payments on account’ are the advance payments you make towards your tax bill. You do this twice a year (by 31 January and 31 July). Each payment is half your previous year’s tax bill.

For more information on ‘payments on account’ visit the gov.uk site.

National Insurance Contributions (NIC)

You will typically pay your NIC through your self-assessment tax return, and you’ll need to budget for this too.

The amount of NI you pay is based on your profit (profit = income – expenses). For help calculating and recording your income and expenses, check out our article on bookkeeping for small business.

You’ll normally pay 2 types of NI as a self-employed tradesperson:

• Class 2 if your profits are £6,725 or more a year
• Class 4 if your profits are £11,909 or more a year

For the tax year 2022/23, you’ll pay:

• Class 2: £3.15 a week
• Class 4: 10.25% on profits between £11,909-£50,270, and 3.25% on profits over £50,270

To budget for the tax and NIC you’ll pay, use the gov.uk ready reckoner tool.

How to pay yourself as a business owner

If you’re wondering how much to pay yourself as a business owner, the first question to ask is, what kind of business structure does your business have?

There are four main types of business structure in the UK:

• Sole trader
• Partnership
• Limited company
• Limited liability partnership

Each business structure will be subject to different taxation rules and benefits, which will ultimately affect how you pay yourself as a business owner.

You can research the tax regulations for different business structures online. Alternatively, an accountant will be able to advise which business structure will suit your company best from a taxation point of view. Investing in an accountant’s expert advice at the start of your new venture could save you thousands in tax and NIC over the years.

It is possible to change the structure of your business at any stage, for example as your business grows, you may change from a sole trader to a limited company. One of the most common reasons for tradespeople changing their business structure is the different tax benefits and simpler tax filing.

Working out ‘how much should I pay myself?’

If you’re asking, what percentage should I pay myself from my business, you’ll be pleased to hear it’s easier to work out than you might think.

1. Income. Start with the current average income from your jobs
2. Expenses. Deduct your known average allowable monthly expenses
3. Tax. Deduct the monthly amount you’ll need to save for tax contributions (scroll up to calculate this)
4. NIC. Deduct the monthly amount you’ll need to set aside for NIC (scroll up to check how much you’ll owe)
5. Your pay! The amount you have left is what you can pay yourself into your personal bank account each month.

Remember: the money you set aside for tax (both your balancing payment and your payments on account) and NIC should be put in a separate saving account to avoid being faced with a tax bill you can’t afford to pay.

Download our free 8-step checklist for paying yourself when self-employed

Download our free checklist that guides you through the 8 steps you cannot afford not to take when paying yourself as a self-employed tradesperson.