How do you pay yourself if you have self-employed income?

‍

Earning self-employed or side income is one of the most rewarding things you can do! Unlike traditional work, you get instantly rewarded whenever you sell something on Etsy, finish a job through Fiverr, or complete a delivery on Deliveroo.

‍

This also makes it a lot more difficult to manage your side income money. A question we get asked a lot: How do you pay yourself from your side income?

‍

Wait, why do I need to pay myself?

Technically you don't. As a sole trader, your side income flows straight into a bank account in your name. That might be a separate account, but it's yours. Being self-employed, HMRC sees no separation between you and your business, you're one and the same. That said, it's not a good idea to spend all that money immediately.

‍

Why can't I spend my hard-earned side income?

While you wholeheartedly deserved those earnings, some of the money in your bank account actually belongs to the tax man. Unlike your employer, the platforms you can use to generate side income do not hold any money aside for HMRC. This means that it is your responsibility to save a part of your income for when your tax return is due.

‍

How do I know how much money to keep aside?

The amount of tax you pay is based on your total earnings. HMRC looks at what you've earned in a tax year (from employment and side income) and takes a certain percentage. The tricky bit is that you don't know how much self-employment or side income you'll make in a year.

‍

The safest thing to do is put aside more money than you'll likely need. A lot of full-time self-employed individuals set aside 30% of their profit each month. If you don't earn more than £50k a year from your job and side income (that's the majority of people in the UK), then you'll likely have some spare savings in the 30% you've put aside.

‍

What do I do with this 30%?

The safest thing to do is put this money in a savings account where it can generate some interest. That said, if you really need the money to run your business in the short term, that's ok, just make sure you have a solid plan to put it back and most importantly, make sure it's accessible when your tax bill is due!

‍

So how should I pay myself?

We suggest setting yourself a monthly salary or allowance. This way you can mimic being employed and not take too much (or too little) money out of the business unintentionally. When thinking about how much to pay yourself, make sure that it's affordable considering the expenses you need to pay and the tax you need to save for. You might also find that you need to adjust this salary up or down regularly.

‍