Sole Traders - can they PAYE themselves?

Raging Pineapples
Raging Pineapples Registered Posts: 110 Dedicated contributor 🦉
Hi all,

I'm trying to find out whether a sole trader who runs a PAYE system can register himself as an employee of his own business, and thereby permit a proportion of his earnings to suffer tax as an employee and the balance to be taxed as trading profit.

I've looked and looked online, but can't find any information on whether this can or cannot be done. I have a vague memory that I saw a post once commenting that it was technically feasible for a sole trader to employ himself.

If it is possible, would there be any special national insurance rules?


  • A-Vic
    A-Vic Registered Posts: 6,970 Beyond epic contributor 🧙‍♂️
    as far as i am aware the only people that can become an employee of a business is a director of a limited company because they dont own the business are just share holders.

    A sole trader will only be seen as drawings
  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
    AFAIK: No.

    Also why would you want to? Surely they will pay more tax as a result?
  • Raging Pineapples
    Raging Pineapples Registered Posts: 110 Dedicated contributor 🦉
    Well if they could, then their salary would reduce the final business profit figure. So their income tax remains the same overall (suffer less under self assessment and more under PAYE), but they could make a substantial National Insurance saving by keeping their Net Profit below 5,075 and thereby claiming Small Earnings Exception for Class 2 NICs. They would also not suffer NI Class 4.

    So they would still suffer NI, but under Class 1, and much less of it.

    Sadly though, I phoned a bloke at the Employers Helpline and he seems fairly convinced that a Sole Trader cannot receive a PAYE Salary from his own business, although I can't find any references to any legislation that says so.
  • wildgoose1uk
    wildgoose1uk Registered Posts: 200 Dedicated contributor 🦉
    He's right.
  • deanshepherd
    deanshepherd Registered Posts: 1,809 Beyond epic contributor 🧙‍♂️

    You won't find anything specific in the tax legislation on this. I believe the legal backing is that you cannot physically enrich yourself by paying yourself a salary. You are merely transferring money from one account that you own to another.
  • burg
    burg Registered, Moderator Posts: 1,441 mod
    Agreed. It's a no.

  • Fingersan
    Fingersan Registered Posts: 84 Regular contributor ⭐
    I agree also with no.

    Besides, the class 4 National Insurance that would be saved is at a rate of 8% compared to the class 1 NI of 11% that would be paid on a salary.
  • Raging Pineapples
    Raging Pineapples Registered Posts: 110 Dedicated contributor 🦉
    Thanks all!

    I wanted to look into it because if you could take any of your income as a sole trader under PAYE, you'd get a separate NI threshold.

    So yeah, you'd pay at 11% instead of 8% - but you'd be able to earn another £5,700 before you did.

    In practice I expected it to be partially allowed so that people could choose whether to be NI'd under Class 2 and 4 or Class 1, but with some kind of aggregation which would knock the dual threshold aspect out of the window.

    But alas, it was not to be :(
  • Paul C
    Paul C Registered Posts: 193 Dedicated contributor 🦉
    Is the best way to set up a company, pay yourself the minimum wage, then pay the rest as dividends?
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