How to pay yourself as a small business owner: salary, dividends, and what’s changed
When starting a business, how to pay yourself and how much are among the most challenging but ultimately satisfying decisions.
Understanding how to pay yourself as an small business owner is essential for managing cash flow, staying tax-efficient, and avoiding compliance issues.
Whether you’re a sole trader or a limited company director, the way you take money from your business directly affects how much tax you pay and how your finances are structured. The right approach is not fixed. It depends on your business type, income level, and current tax rules.
This guide explains your options, how they work, and how to choose the most effective approach for your situation.
Key Takeaways
- Sole traders take drawings, not a salary
- Limited company directors typically use salary and dividends
- Dividends are usually more tax-efficient but depend on profits
- Director’s loans can help short-term but carry tax risks
- Your strategy should be reviewed yearly as tax rules change
What Does It Mean to Pay Yourself as a Business Owner?
Paying yourself means taking money out of your business in a way that aligns with your legal structure and tax obligations.
There are three main methods:
- Drawings (sole traders)
- Salary (via payroll)
- Dividends (limited companies only)
Each option is taxed differently, so choosing the right mix can significantly impact your overall income.
How much do small business owners make in the UK?
There are no statistics available on what small business owners pay themselves in the UK.
The closest we can get is to look at average net profits.
According to Legal & General’s SME report 2019, 51% of businesses that are two years old or less have a net annual profit of £50,000 or less.
Those between three and 10 years old turn an average profit of £261,000. Those aged 10 years or older earn £342,000 a year on average.
How to Pay Yourself as a Sole Trader
If you’re a sole trader, the process is simple.
You take money from your business as drawings, rather than a salary. There is no separate payroll, and you are taxed on your profits, not what you withdraw.
Key points:
- You pay Income Tax and National Insurance on profits
- You can take money out at any time
- There is no tax advantage to leaving money in the business
Your profits are calculated after deducting allowable expenses.
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How to Pay Yourself as a Limited Company Director
Most company directors take a combination of salary and dividends.
This approach has historically been tax-efficient because dividends are taxed at a lower rate than salary, and they don’t attract National Insurance contributions.
The broad principle holds, but the gap has narrowed in recent years as the dividend allowance has been cut.
Taking a salary
The most common approach is to pay yourself a salary up to the Primary Threshold for National Insurance — set at £12,570 for 2024/25. This keeps you within the National Insurance-free band, means you don’t pay income tax on the salary (it falls within your Personal Allowance), and the company gets corporation tax relief on the salary cost.
Some directors pay themselves a salary up to the full Personal Allowance of £12,570 even if no National Insurance is due. Others set it at the Lower Earnings Limit — currently £6,396 — to preserve their National Insurance record without triggering contributions. The right level depends on your circumstances, and it’s worth running the numbers with your accountant annually.
Taking dividends
Once you’ve taken a salary, you can pay yourself additional income as dividends from the company’s post-tax profits. Dividends are taxed at lower rates than salary — 8.75% for basic-rate taxpayers, 33.75% at the higher rate — and they don’t attract National Insurance.
£500
Dividend allowance for 2024/25 — the amount you can receive in dividends without paying tax. This has reduced significantly from £2,000 in prior years.
Above the £500 threshold, dividends are taxed at the relevant rate depending on your total income. For most directors taking a modest salary plus dividends within the basic-rate band, this is still more tax-efficient than taking everything as salary — but the advantage is smaller than it was a few years ago.
Any dividend can only be paid if the company has sufficient distributable profits. You can’t pay a dividend that exceeds retained profits — doing so creates an illegal distribution, which is worth being clear on.
Director’s loan
A third option is a director’s loan — borrowing money from your company rather than taking a salary or dividend. This can be useful in certain situations, but it comes with rules. If you owe the company money at the end of an accounting period, and the loan isn’t repaid within nine months of the year-end, the company faces a 32.5% S455 tax charge on the outstanding amount.
Director’s loans are a legitimate tool but shouldn’t be used as a way to avoid tax — HMRC watches them closely. Use them for short-term cash flow, not as a substitute for proper remuneration planning.
How to pay yourself in a partnership
In a partnership, profits are shared between the partners. So, you and your partners pay yourself simply by withdrawing your agreed share of the profits.
Partners must also keep specific business records.
One nominated partner keeps the records, but all partners are responsible for the records.
Salary vs Dividends: Which Is Better?
There is no single answer. Most directors use a combination.
Typical approach:
- Take a small salary within tax-free thresholds
- Top up income with dividends
Comparison:
Salary
- Taxed through PAYE
- Subject to National Insurance
- Reduces corporation tax
Dividends
- Lower tax rates
- No National Insurance
- Must come from profits
How Much Should You Pay Yourself?
This depends on several factors:
- Your total income
- Tax thresholds
- Business profitability
- Personal financial needs
General guidance:
- Stay within tax-efficient thresholds where possible
- Avoid pushing income unnecessarily into higher tax bands
- Review your strategy annually
How does Making Tax Digital affect this?
Making Tax Digital for Income Tax (MTD for IT) is changing the way sole traders and landlords report their income to HMRC. From April 2026, those earning over £50,000 will need to submit quarterly updates digitally rather than an annual Self Assessment return.
For limited company directors, MTD for IT applies to any self-employment or rental income you report personally — not to the company’s own corporation tax filing, which remains unchanged. If you take a salary and dividends, you’ll still need to report those through a personal tax return (or its MTD equivalent), and the same rules about allowances and thresholds apply.
The practical implication is that keeping good records throughout the year matters more than ever. MTD-compatible software makes this much easier — your transactions are categorised as you go, so there’s less scrambling at year-end.
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How to pay your own taxes
Self-employed people and partners are taxed on the profits you make, not on your drawings.
Self-employed people pay this tax through the Self Assessment system, including payments on account. Partners share the business’s profits, and each partner pays tax on their share via the Self Assessment system.
Make sure you understand which expenses are tax-deductible.
Limited companies pay corporation tax on their profits.
As a director, you also pay income tax and National Insurance through PAYE on your salary, and tax on any dividends you earn through the business over the current dividend allowance of £2,000.
Dividends are classed as personal earnings, so you do this through the Self Assessment system.
To maximise tax efficiency, company directors often pay themselves a salary up to the personal allowance – then the rest in dividends. This can work out slightly more favourably compared to employment or other self-employed structures but limited companies are administratively more onerous.
Your accountant or payroll function will instruct you on how to pay each tax you owe to HMRC.
And if you have any queries on managing your tax affairs, contact your accountant or a tax adviser
When Should You Review Your Pay Strategy?
You should review how you pay yourself:
- At the start of each tax year
- When tax rules change
- When your income increases
- When your business structure changes
Even small adjustments can lead to meaningful tax savings.
What’s the best approach for you?
The honest answer is: it depends, and it should be reviewed at least once a year, ideally before the tax year starts. The most tax-efficient split between salary and dividends shifts as allowances change, as your income grows, and as your personal circumstances evolve.
A few things to think about: if your income is likely to push into the higher-rate band, dividend tax becomes more significant. If you’re building a pension, salary and employer contributions can be tax-efficient in ways that dividends aren’t. If you have a spouse who’s a shareholder, splitting dividends between you may use both allowances more effectively.
Running this properly with an accountant — even just an annual conversation — typically pays for itself in tax savings many times over.
How to pay yourself as a small business owner FAQs
For limited companies, a mix of salary and dividends is usually the most efficient.
No. You need profits to pay dividends, and many directors still take a salary for tax and compliance reasons.
No. Sole traders take drawings and are taxed on profits.
Yes, for sole traders. For limited companies, they must follow salary, dividend, or loan rules.
You may trigger tax liabilities or director’s loan penalties.
Final Thoughts
Knowing how to pay yourself as a small business owner is not just about taking income. It is about doing it in a way that is tax-efficient, compliant, and sustainable.
The right structure depends on your business type and financial goals. For most limited company directors, combining salary and dividends remains the most effective approach, while sole traders benefit from simplicity but less flexibility.
If you are unsure, reviewing your approach with an accountant each year can help you stay aligned with changing tax rules and maximise your income.
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