Can a Sole Trader Employ Staff and Pay Them Through PAYE?

One of the most common questions we receive from new business owners is:

"Can a sole trader employ staff and pay them through PAYE?"

The simple answer is yes.

Many people assume that because a business operates as a sole trader, it cannot have employees. This is a common misconception.

Can a Sole Trader Employ People?

Yes.

A sole trader can employ one or more members of staff, either on a full-time, part-time or temporary basis.

Once you become an employer, you have legal responsibilities, including operating a PAYE scheme where required.

What Is PAYE?

PAYE (Pay As You Earn) is HMRC's system for collecting Income Tax and National Insurance from employees' wages.

As an employer, you are responsible for:

• Registering as an employer with HMRC.
• Running payroll.
• Calculating Income Tax and National Insurance.
• Making deductions from employees' wages.
• Reporting payroll information to HMRC under Real Time Information (RTI).
• Paying HMRC the tax and National Insurance due.

Can a Sole Trader Pay Themselves Through PAYE?

No.

This is where many people become confused.

Although a sole trader can employ staff and operate PAYE for those employees, they cannot put themselves on their own payroll.

This is because a sole trader and their business are legally the same person.

Instead of receiving a salary, a sole trader takes money from the business as drawings.

These drawings are not treated as business expenses and are not processed through PAYE.

The sole trader pays Income Tax and National Insurance through their Self Assessment tax return based on the business profits.

Sarah runs a hairdressing salon as a sole trader.

She employs:

• Two hairstylists.
• One apprentice.
• One receptionist.

Sarah operates PAYE for all four employees.

However, Sarah does not pay herself through PAYE. Instead, she withdraws money from the business as drawings and reports her profits through Self Assessment.

When Can You Pay Yourself Through PAYE?

If your business operates as a limited company, the position is different.

A limited company is a separate legal entity.

As a company director, you can pay yourself a salary through PAYE and may also receive dividends, depending on your circumstances.

Key Points

✔ A sole trader can employ staff.

✔ A sole trader can register for PAYE.

✔ PAYE is used to pay employees.

✔ A sole trader cannot pay themselves through PAYE.

✔ Sole traders pay tax through Self Assessment and take money from the business as drawings.

Final Thoughts

Choosing the right business structure is important, but whichever structure you choose, understanding your payroll responsibilities is essential.

If you're a sole trader thinking about employing staff, make sure your payroll is set up correctly from the start. Registering for PAYE when required and keeping accurate payroll records will help you meet your HMRC obligations and avoid unnecessary penalties.

If you're unsure whether you need to register as an employer or how to operate PAYE, seek professional advice before taking on your first employee.