As with lots of things related to tax and accounting, there isn’t one answer as to what is the right way to pay yourself as a sole trader because there are many variables to be taken into account. As a sole trader, all profits are yours.  The money taken out of the business is called drawings and is not taxable nor is it tax-deductible. For the purposes of this post, I will be using the term “drawings” to refer to what the sole trader pays themselves. Many sole traders call it their wages but this is not technically correct and I don’t want it to get confused with wages paid to employees.   

How is a sole trader taxed?

A sole trader is taxed on the profits of the business. The profit is the income minus the business expenses. Even if the profits are left sitting in the business bank account, the sole trader is taxed on them at the end of the year. Any surplus cash held by the business is available for the owner to take out.  It works differently for limited companies who do pay actual wages to their directors.

Revenue vs Profits

It is important to distinguish between revenue and profits when deciding how much to pay yourself.  Revenue is total income or sales. What you pay yourself should not be based on your revenue but rather should be based on the profits. This means you are meeting the liabilities of your business before paying yourself. It is up to the business owner how much money to take from the business. However, there is a need to balance the expenses of the business and drawings while ensuring there is enough cash flow to meet your tax liability (including preliminary tax).

How to decide on the level of drawings?

Depending on how the business is structured, the system used to decide on the level of drawings will vary. For someone who has a seasonal business, they may take a different amount each month depending on profits for that month.  Someone who has built up a consistent monthly business may be in a position to take the same amount of drawings each month. The process for deciding on the level of drawings should be done as part of your monthly bookkeeping.  If you have a monthly bookkeeping system, then you will know how much surplus cash you have in the bank is available to you as drawings. If you do not have a monthly bookkeeping system, then it is time to implement one.  The monthly bookkeeping process will ensure that all invoices are paid and an amount is put aside for the tax bill. Then it can be decided what is an appropriate amount to transfer to your personal account.

Pay yourself something!

One last point to note is that it is important to pay yourself something, even a small amount, to keep your morale, motivation and productivity boosted. While retaining money in the business to help grow and scale your business is important, I would do this after some drawings have been taken.

There are further articles here which you may find useful.

Disclaimer: This post does not constitute financial advice and is for information and educational purposes only. This blog does not constitute an accountant/client relationship.