As a sole trader, all of the income your business receives is classed as your personal income. You can then choose how much of your income to put back into the business. Any draws you make from your business’s income stream are called Owner’s Draws. As you are taxed on all of your business income as personal income, there are no additional fees when taking draws.
Separating business from personal
Many sole traders decide to set up a second current account for their business. You don’t have to use a business bank account for this, although some banks will stipulate that personal accounts shouldn’t be used for business transactions. Business current accounts will have benefits and fees that will change depending on the bank providing them.
Whether you set up a business bank account, or just another personal one, having a separate account for your business is extremely helpful. It makes it easier to see your business’s income and expenses and allows you to see how much money you’re taking out as an owner’s draw.
How much to pay yourself
This comes down to how much you need against how much your business needs. Making sure you have a well-prepared budget in place for both your business and personal needs should allow you to make these decisions with ease. Having a bank account for your business makes it much easier to budget.
When budgeting for yourself you’ll want to consider:
- Any household payments (rent, mortgage, bills, council tax)
- Essential items (clothing, toiletries)
- Sustenance (food, drink)
- Transport (vehicle payments)
- Personal savings
- Costs for personal wellbeing (entertainment, socialising)
When budgeting for your business you’ll want to consider:
- Estimated expenses (fuel, office rent)
- Projected business growth (new equipment, new employees)
- Who else needs to be paid (salaries)
- Spare funds in case of emergencies
You may experience seasons of ups and downs regarding income. As a result of this uncertainty, freelancers must learn how to deal with inconsistent income and develop a reasonable budget for themselves.
You may want to pay yourself, or your employees, a salary.
Benefits of a salary include:
- Guaranteeing yourself a regular wage
- Easy separation of business and personal funds
- Granting security for any employees that you have
If you want to start paying a salary, you will have to register your business as a limited company, and then register as an employer.