How you actually get money out of your business works completely differently depending on your structure. This is one of the clearest places where sole trader and limited company setups diverge — not just in tax treatment, but in the whole mechanism.
Sole traders: drawings
As a sole trader, there’s no legal distinction between the business’s money and your own. You don’t “pay yourself” in a formal sense — you simply take money out of the business as and when you need it. This is called drawings.
Drawings aren’t a business expense and don’t reduce your taxable profit. Whether you take out £500 a month or leave it all in the business account, you’re taxed on the total profit the business makes for the year — not on what you happen to withdraw.
Example: A sole trader whose business makes £30,000 profit in a year pays Income Tax and National Insurance on that £30,000, regardless of whether they drew out £30,000, £15,000, or left some of it sitting in the account.
This makes drawings simple in mechanism but easy to get wrong in practice — because there’s no payslip and no formal record required, some sole traders lose track of what they’ve taken out over the year, which can make bookkeeping and Self Assessment harder than it needs to be. Keeping a simple running log of drawings, even informally, makes year-end far easier.
Limited companies: salary and dividends
A limited company is a separate legal entity, so getting money out requires a formal mechanism — you can’t just “take” company money without it being one of a few defined routes.
Salary, paid through PAYE:
- Treated as an expense to the company, reducing its Corporation Tax bill
- Subject to Income Tax and National Insurance, both employee and employer contributions
- Requires a payroll scheme to be set up, even for a single director
- Not a company expense — paid from profit that’s already been taxed at the company level
- Taxed at dividend rates through the director’s personal Self Assessment, which are generally lower than equivalent Income Tax rates
- Can only be paid if the company has sufficient distributable profits — paying dividends without enough profit to cover them is not simply inadvisable, it can be unlawful
- Payroll needs to be run through PAYE, even for a single director paying themselves monthly, with reports submitted to HMRC each pay period
- Dividends need to be formally declared and minuted, with dividend vouchers issued — this is a legal formality, not just good practice
- Directors’ loan accounts come into play if a director takes money out beyond salary and declared dividends — this is treated as a loan from the company and has its own tax implications if not repaid within set timeframes
Dividends, paid from company profits after Corporation Tax:
Why most director-owners use a mix
A common approach for owner-directors is a low salary — often set around the level that qualifies for National Insurance credits without triggering much actual NI liability — topped up with dividends for the rest. This tends to be more tax-efficient than taking everything as salary, because dividend tax rates are generally lower than combined Income Tax and NI on salary.
That said, the size of the gap has narrowed over recent years as dividend allowances and rates have shifted, so it’s worth checking current thresholds rather than assuming an old salary/dividend split is still optimal.
Example: A single-director consultancy might pay a salary just above the NI threshold, then take the bulk of remaining profit as dividends declared once or twice a year, after checking the company has enough retained profit to cover them.
The compliance side
Salary and dividends both come with paperwork that drawings don’t:
Example: A director who takes an ad hoc withdrawal from the company account without it being salary or a properly declared dividend has effectively taken a director’s loan, whether or not they intended to — and that has consequences if it isn’t repaid promptly.
Side by side
| Sole Trader (Drawings) | Limited Company (Salary + Dividends) | |
|---|---|---|
| Formal mechanism required | No | Yes |
| Taxed on | Total business profit | Salary (Income Tax + NI) and dividends (dividend tax) separately |
| Reduces company/business tax | No effect | Salary reduces Corporation Tax; dividends don’t |
| Paperwork | Minimal | Payroll records, dividend vouchers, board minutes |
| Flexibility | Take what you like, when you like | Bound by payroll timing and available distributable profit |
The mechanism matters as much as the tax rate here — a sole trader can move money freely, while a limited company director is working within a formal system that needs setting up properly from the start, not retrofitted once HMRC asks questions.