Contractors and Freelancers: How Should You Pay Yourself?

Google reviews
May 03, 2016

The freedom of working for yourself is pretty unrivalled when it comes to making a living. Somewhat erratic wages are a natural by-product of working around clients who have their own schedules and priorities, and freelancing means you’ll have to weather the peaks and troughs to achieve self-sufficiency.

What can be difficult is knowing how much to take from your gross earnings, and how to declare them for tax purposes. Do you carry on as a sole trader, or incorporate your business to become more tax efficient? Let’s look at how you should pay yourself to minimise your tax bill and maximise financial security.

Going It Alone

Sole traders face a basic tax rate of 20% up to the threshold of £43,000 per annum. This includes a personal allowance of £11,000, meaning the remaining (potential) £32,000 of taxable income is liable for a 20% slice of the pie. Above this, tax rates jump to 40%.

Your taxable income determines how much you owe after fixed costs, overheads and tax relief are taken into account, which makes it crucial to stay on top of your incomings and outgoings to ensure you have enough to pay yourself and your tax. There’s plenty of great accounting software out there for freelancers and contractors to streamline their bookkeeping.

It’s wise to establish a regular wage for yourself, rather than treating your business bank account as a pot to dip in and out of. Bear in mind that cash flow issues can be avoided by withdrawing the same amount each month, regardless of whether your profits have shot up or down. This will give you more long-term security and provide ample room to invest in growth when the time calls for it.

Paying Dividends

Whilst setting up as a sole trader is extremely simple, many contractors and freelancers incorporate their businesses in the long run, to become more tax efficient. As the owner of a limited company you’re also a shareholder, meaning you can be more flexible in the way you withdraw your profits.

Limited company owners can withdraw their profits in two ways – as a salary, and as dividends. As with sole traders, your salary is subject to 20% income tax after £11,000, whereas dividends are taxed at a much lower rate of just 7.5%.

With this in mind, the most tax-efficient way to pay yourself operating under a limited company, is to pay yourself an annual salary under the £11,000 personal allowance, and withdraw the rest as dividends. Furthermore, as dividends are subject to a £5,000 allowance, you can make savings here too.

Getting to grips with freelancing and contracting can be difficult at first, but with the help of a specialist accountancy firm (that’s us!), you can get your head around tax implications and understand how best to pay yourself.

Looking for expert advice on taxation and take home pay? Bright Ideas Accountancy can help with all of your accounting needs. Call us on 0161 669 4221, or email for a quote.


Question mark


Recent Articles

Inheritance Tax at record levels, but Business Relief can help

Inheritance Tax at record levels, but Business Relief can help

Inheritance Tax (IHT) has reached a record level in the UK, with £7.5 billion flowing into Treasury coffers in 2023/24, up from £7.1 billion the previous tax year. One key reason for this growing tax take is rising property prices - the average house price in the UK...

Tipping Act Code of Practice to bring fairness to employees

Tipping Act Code of Practice to bring fairness to employees

Whenever you leave a tip in a restaurant or a hairdressing salon, for example, you would hope that the tip money you left will go directly to the person who provided you the service you are tipping for. But for many restaurants and other industries, that hasn’t always...

Everyone should check their tax code now

Everyone should check their tax code now

HMRC will provide new tax codes at the start of every new tax year if the Personal Allowance has changed, if someone has had a change of circumstances, including perhaps had a pay rise, and even to those who are taking their pensions for the first time. It’s important...

Ready to join us?

Whether you’re a contractor, freelancer, or small business, Bright Ideas can help remove the burden of time-consuming and complex finances. We’ll draw on our years of knowledge and experience earned helping sole traders just like you.

When you choose us, you’ll be assigned a dedicated Account Manager who’ll provide one-on-one support that’s customised to your business. Communication is key, so we’ll always answer your questions or requests as soon as we can. In fact, we offer a same-day response guarantee for emails and calls received before 3pm.

Contact us to get started

Give us a call us or send an email today!

Looking to switch accountants?
We make the transition simple.

Does your current accountant give 1-to-1 support? Are they fast and thorough?
Slap-dash services hold businesses back, so try our experts instead.

Move to an accountancy service that goes the extra mile…

Start the conversation

Let’s make your finances Brighter

Call us Monday to Friday 9am - 5pm

0161 669 4221

Request a call back