{"id":17487,"date":"2002-12-20T11:37:00","date_gmt":"2002-12-20T11:37:00","guid":{"rendered":"http:\/\/startups.co.uk\/?p=17487"},"modified":"2024-04-05T00:00:00","modified_gmt":"2024-04-05T00:00:00","slug":"how-to-decide-how-to-pay-yourself-in-your-business","status":"publish","type":"post","link":"https:\/\/startups.co.uk\/people\/how-to-decide-how-to-pay-yourself-in-your-business\/","title":{"rendered":"How to pay yourself as a business owner"},"content":{"rendered":"<div class=\"wpb-content-wrapper\"><p>[vc_row][vc_column][vc_column_text]Deciding how much to pay yourself as a business owner is a tricky process. With the stresses of running a company, there&rsquo;s a temptation to reward your efforts with a big payday. But this would directly eat into your profits, overheads, and &ndash; if you&rsquo;ve a team working under you &ndash; your wider <a href=\"https:\/\/startups.co.uk\/people\/payroll\/what-is-payroll\/\">employee payroll<\/a>.<\/p>\n<p>The books must stay balanced. Often, entrepreneurs will pay themselves the bare minimum; instead keeping their hard-earned pennies in the till to strengthen cash flow.<\/p>\n<p>If revenue is high enough for a raise, there are still legal requirements to consider. Self-employed workers have almost full control over their profits, but partners or company directors need to adhere to stricter reporting and tax regulations.<\/p>\n<p>This guide will help you to work out when you can afford to take a salary, how much it should be, and how to stay compliant when doing your own payroll.[\/vc_column_text]<\/p><div class=\"jumplinks-content\">\n <h3 class=\"jumplinks-content-title\">\n This article will cover: <\/h3>\n <ul class=\"jumplinks-content-list\">\n <li class=\"jumplinks-content-item\">\n <a class=\"jumplinks-content-link jumplink-anchor\" href=\"#link-how-to-pay-yourself-as-a-sole-trader\">How to pay yourself as a sole trader<\/a>\n <\/li>\n <li class=\"jumplinks-content-item\">\n <a class=\"jumplinks-content-link jumplink-anchor\" href=\"#link-how-to-pay-yourself-as-a-partner\">How to pay yourself as a partner<\/a>\n <\/li>\n <li class=\"jumplinks-content-item\">\n <a class=\"jumplinks-content-link jumplink-anchor\" href=\"#link-how-to-pay-yourself-as-a-limited-company\">How to pay yourself as a limited company<\/a>\n <\/li>\n <li class=\"jumplinks-content-item\">\n <a class=\"jumplinks-content-link jumplink-anchor\" href=\"#link-how-much-should-i-pay-myself\">How much should I pay myself?<\/a>\n <\/li>\n <\/ul>\n<\/div>\n[\/vc_column][\/vc_row][vc_row][vc_column]<div class=\"jumplink-anchor-section\">\n <div class=\"jumplink-anchor-pointer\" id=\"link-how-to-pay-yourself-as-a-sole-trader\"><\/div>\n<\/div>\n[vc_column_text]\n<h2>How to pay yourself as a sole trader<\/h2>\n<p>Registering as a <a href=\"https:\/\/startups.co.uk\/setting-up\/become-a-sole-trader\/\">sole trader<\/a> is the simplest method for paying your salary. In this structure, the business owner <em>is <\/em>the business, which means they can simply pay themselves by taking a share of the profits. Of course, there are tax implications for this, which we&rsquo;ll explain below.<\/p>\n<p>Classed as &ldquo;business drawings&rdquo;, this is different from earning a salary. In effect, you&rsquo;ll be able to withdraw from your profits at any time (although naturally, the amount you can take will depend on business performance).<\/p>\n<p>Sole traders who store their earnings in a personal account won&rsquo;t even need to take money out. However, it&rsquo;s advisable to keep funds in a specialist business bank account and transfer them to your individual bank card each month, as this makes managing finances easier.<\/p>\n<h3>Tax considerations<\/h3>\n<p>Business drawings are not taxed as individual withdrawals. Instead, they count towards overall business profits. At the end of the year, the owner will pay tax on the total earned through their <a href=\"https:\/\/startups.co.uk\/tax\/how-to-do-a-tax-return\/\">self-assessment tax return<\/a> (after non-personal expenses have been removed).<\/p>\n<p>Sole traders should set aside a percentage of their drawings to cover end-of-year tax costs. These are based on income, not corporation, tax rates which start at zero and finish at 45%.<\/p>\n<p>With great pay power comes great responsibility. Sole traders and partners (see section below) are liable for their personal tax bill, and any incorrect figures it includes. Ensure you keep a full record of your organisation&rsquo;s profits and losses if HMRC comes knocking, including:<\/p>\n<ul>\n<li>Business expenses<\/li>\n<li>Sales and income figures<\/li>\n<li><a href=\"https:\/\/startups.co.uk\/tax\/what-is-vat-and-how-does-it-affect-my-small-business\/\">VAT records<\/a> (if your taxable turnover is higher than &pound;85,000 a year)<\/li>\n<\/ul>\n<p>[\/vc_column_text]\n<\/p><div class=\"form-simple\" data-eventcategory=\"feedback\" data-eventaction=\"Email-Subscribe\">\n <form target=\"_blank\" class=\"form-subscribe\" id=\"form-subscribe\">\n\n <div class=\"form-loader\">\n <div class=\"spinner-box\">\n <span class=\"spin-loader\"><\/span>\n <p class=\"form-loader-text\">Verifying<\/p>\n <\/div>\n <\/div>\n\n <div class=\"form-subscribe-info\">\n <p class=\"form-subscribe-title\">Get the latest startup news, straight to your inbox<\/p>\n <p class=\"form-subscribe-subtitle\">Stay informed on the top business stories with Startups.co.uk&rsquo;s weekly newsletter<\/p>\n <\/div>\n\n <div class=\"form-subscribe-box\">\n <div class=\"input-row input-row-text\">\n <input type=\"text\" class=\"form-control\" name=\"first_name\" placeholder=\"Name\" required>\n <span class=\"input-row-error\">Please fill in your name<\/span>\n <\/div>\n\n <div class=\"input-row input-row-email\">\n <input type=\"email\" class=\"form-control\" name=\"email_address\" placeholder=\"Email Address\" required>\n <span class=\"input-row-error\">Please fill in your email<\/span>\n <\/div>\n\n <div class=\"google-inline-captcha\">\n <div class=\"captcha-message\">\n <span class=\"btn-close\"><\/span>\n <span class=\"form-messages\"><\/span>\n <\/div>\n <\/div>\n\n <button class=\"form-subscribe-button btn\" type=\"submit\" data-eventlabel=\"https:\/\/startups.co.uk\/wp-json\/wp\/v2\/posts\/17487\">\n Subscribe <\/button>\n <\/div>\n\n <p class=\"form-subscribe-privacy-policy\">\n By signing up to receive our newsletter, you agree to our <a href=\"https:\/\/www2.mvfglobal.com\/privacypolicy\/b649e\" title=\"Privacy Policy\">Privacy Policy<\/a>. You can <strong>unsubscribe<\/strong> at any time. <\/p>\n\n <\/form>\n<\/div>\n[\/vc_column][\/vc_row][vc_row][vc_column]<div class=\"jumplink-anchor-section\">\n <div class=\"jumplink-anchor-pointer\" id=\"link-how-to-pay-yourself-as-a-partner\"><\/div>\n<\/div>\n[vc_column_text]\n<h2>How to pay yourself as a partner<\/h2>\n<p>Business partners also tend to use business drawings to pay themselves. Each partner takes out an agreed percentage share of the profits on a pre-arranged, routine basis (eg. X% per fortnight). Partners can either:<\/p>\n<ul>\n<li>Agree set amounts based on individual responsibilities and commitments<\/li>\n<li>In lieu of an agreement, split all profits equally, regardless of contribution<\/li>\n<\/ul>\n<h3>Tax considerations<\/h3>\n<p>As with sole traders, all business drawings for partnerships are taxed collectively at <a href=\"https:\/\/startups.co.uk\/people\/payroll\/payroll-year-end\/\">payroll year-end<\/a> as part of the organisation&rsquo;s Final Payment Submission (FPS), <em>not <\/em>per instalment. The partners are taxed on the share of the profits they&rsquo;re allocated at this stage.<\/p>\n<p>One partner must also nominate themselves to keep records of any profits drawn for the taxman. All partners are responsible for this information being correct.[\/vc_column_text][vc_column_text]<strong>Read more:<\/strong> <a href=\"https:\/\/startups.co.uk\/people\/payroll\/how-is-payroll-calculated\/\">How is payroll calculated?<\/a>[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column]<\/p><div class=\"jumplink-anchor-section\">\n <div class=\"jumplink-anchor-pointer\" id=\"link-how-to-pay-yourself-as-a-limited-company\"><\/div>\n<\/div>\n[vc_column_text]\n<h2>How to pay yourself as a limited company<\/h2>\n<p>In a limited company, entrepreneurs are classed as employees who are separate to the business. Unlike sole traders, they cannot take money out as business drawings. Instead, they must pay themselves a regular salary.<\/p>\n<p>While more confusing to set up, there are some advantages. Chiefly, a salary is a regular payment, whereas drawings are taken at the sole trader or partner&rsquo;s will. This can help owners to better budget for their personal and business costs.<\/p>\n<p>In order to pay yourself as an employee, you&rsquo;ll need to <a href=\"https:\/\/www.gov.uk\/register-employer\">register as an employer<\/a> with HMRC. If the wage is less than &pound;533 per month, business owners can skip this step as it is below the Lower Earnings Limit (LEL). HMRC will then send over a PAYE activation code for setup.<\/p>\n<h3>Tax considerations<\/h3>\n<p>Once payroll is set up, income tax and <a href=\"https:\/\/startups.co.uk\/people\/payroll\/national-insurance-rates\/\">National Insurance contributions (NICs)<\/a> will be deducted from payslips, which are submitted to HMRC via the pay as you earn (PAYE) system. <a href=\"https:\/\/startups.co.uk\/people\/payroll\/best-hr-payroll-software\/\">Payroll software<\/a> is the easiest way to automate this process.<\/p>\n<p>All tax payments are deducted automatically by HMRC and in advance of the Final Payment Submission (FPS). That means entrepreneurs aren&rsquo;t landed with a hefty tax bill at the end of the financial year.<\/p>\n<p>Limited company owners should be aware that salaries are taxed as <strong>income<\/strong>. Salaries are business expenses, so they&rsquo;ll reduce your overall profits and the amount of Corporation Tax you&rsquo;ll pay. But a higher salary means a higher tax bracket, and therefore less take-home pay.<\/p>\n<h3>Paying yourself in dividends<\/h3>\n<p>Some company owners choose to pay themselves dividends to stay below the tax threshold. For example, if they pay themselves the tax-free Personal Allowance of &pound;12,570 per year and make up the rest in dividends, as these are taxed at a low rate of 8.75%.<\/p>\n<p>HMRC has rules to prevent excessive use of dividends to avoid taxes. Because of this, dividends can only be agreed by all directors during a formalised meeting. <a href=\"https:\/\/startups.co.uk\/people\/payroll\/payroll-service-providers\/\">Payroll service experts<\/a> can also offer bespoke advice on compliance.[\/vc_column_text]\n <\/p><div class=\"highlight-box\">\n <div class=\"highlight-box-decor\">\n <svg class=\"brush-stroke-svg brush-stroke-big\" preserveaspectratio=\"none\" viewbox=\"0 0 116 6\" version=\"1.1\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" xmlns:xlink=\"http:\/\/www.w3.org\/1999\/xlink\">\n <g stroke=\"none\" stroke-width=\"1\" fill=\"#ea0037\">\n <path d=\"M94.0845406,5.55784045 C93.4629887,5.58758734 92.7723755,5.58758734 92.2198849,5.64708111 C92.0127009,5.66195455 91.7824965,5.67682799 91.5062512,5.66195455 C89.5955547,5.58758734 87.6618377,5.5727139 85.7511411,5.67682799 C85.5669776,5.69170144 85.2446914,5.67682799 84.9914666,5.67682799 C82.8275451,5.66195455 80.6866442,5.63220767 78.4997023,5.67682799 C76.0825561,5.72144832 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M93.4369469,5.03977318 C93.5273365,5.03977318 93.7081157,5.02037466 93.7081157,5.02037466 C93.7382456,5.00097614 93.5574663,4.98157762 93.3766871,4.98157762 C93.2862975,4.98157762 93.1055183,5.00097614 93.1055183,5.00097614 C93.0452585,5.03977318 93.2260378,5.03977318 93.4369469,5.03977318 Z M64.6758363,6 C64.7963558,6 64.977135,6 65.0072649,6 C65.1579143,5.98060148 64.977135,5.96120296 64.7963558,5.96120296 C64.7059662,5.96120296 64.5854467,5.96120296 64.4950571,5.98060148 C64.5553169,5.98060148 64.6155766,5.98060148 64.6758363,6 Z M90.6789362,4.03643854 C90.5885466,4.03643854 90.4680271,4.01704002 90.3776375,4.01704002 C90.1365986,4.01704002 90.0160791,4.03643854 90.1667284,4.05583706 C90.2269882,4.05583706 90.4077674,4.07523558 90.498157,4.05583706 C90.5885466,4.07523558 90.6186765,4.05583706 90.6789362,4.03643854 Z M86.2696559,4.0213508 C86.0888766,4.0213508 85.9080974,4.0213508 85.7273182,4.0213508 C85.546539,4.0213508 85.4260195,4.04074932 85.4862792,4.04074932 C85.6369286,4.04074932 85.8478377,4.06014784 86.0286169,4.06014784 C86.1792662,4.06014784 86.2696559,4.04074932 86.2696559,4.0213508 Z\"><\/path>\n <\/g>\n <\/svg>\n <\/div>\n <div class=\"highlight-box-headline\">\n \n <span class=\"highlight-box-title\">\n Could umbrella payroll work for you? <\/span>\n <\/div>\n \n <div class=\"highlight-box-content\">\n <p>Umbrella payroll exists to provide an option for contractors working short-term assignments to do so under a PAYE framework, whilst retaining the flexibility that a self-employed person has. Head here for <a href=\"https:\/\/startups.co.uk\/people\/payroll\/umbrella-payroll-guide\/\">our comprehensive guide<\/a>.<\/p>\n <\/div>\n <\/div>\n[\/vc_column][\/vc_row][vc_row][vc_column]<div class=\"jumplink-anchor-section\">\n <div class=\"jumplink-anchor-pointer\" id=\"link-how-much-should-i-pay-myself\"><\/div>\n<\/div>\n[vc_column_text]\n<h2>How much should I pay myself?<\/h2>\n<p>How much is too much when you&rsquo;re setting your own salary? There&rsquo;s no right answer to this question. After all, no two cash forecasts are the same, and the right amount for one entrepreneur could bankrupt another.<\/p>\n<p>There are some facts that might impact your salary choice. Sole traders who pay themselves below the Personal Allowance threshold of &pound;12,570 per year can avoid Income Tax charges (although this could impact your eligibility for the state pension).<\/p>\n<p>Limited company owners registered as an employee also won&rsquo;t have to pay NICs if their salary is under the Lower Earnings Threshold (currently &pound;1,048 a month).<\/p>\n<p>However, these are both very low amounts and could leave you in a spot of bother if you need a bigger take-home one month.<\/p>\n<p>As mentioned, topping up pay with dividends is one solution for company owners. Another is to take a bonus during a period of business stability. While still taxed as income, these can be taken from profits at any time for greater flexibility.<\/p>\n<h3>Budgeting for pay as an employer<\/h3>\n<p>Two other considerations when deciding how much to pay yourself are your business and personal budgets.<\/p>\n<p><strong>Business budget<\/strong><\/p>\n<p>Whatever amount you deduct from your profits, ensure that enough is left over to cover:<\/p>\n<ul>\n<li><strong>Payroll <\/strong>(wages, <strong><a href=\"https:\/\/startups.co.uk\/people\/management\/employee-benefits-perks-retention\/\">employee benefits<\/a><\/strong>, and employer taxes)<\/li>\n<li><strong><a href=\"https:\/\/startups.co.uk\/setting-up\/cost-of-goods-sold\/\">Cost of goods sold (COGS)<\/a><\/strong><\/li>\n<li><strong>Repayments <\/strong>(business loans with associated interest)<\/li>\n<li><strong>Marketing <\/strong>and advertising<\/li>\n<li><strong>Rent or lease costs&nbsp;<\/strong><\/li>\n<li><strong>Utilities like <a href=\"https:\/\/startups.co.uk\/premises\/energy\/business-electricity-suppliers-prices\/\">electricity and gas<\/a><\/strong><\/li>\n<li><strong>Investment <\/strong>for growth, like product development<\/li>\n<\/ul>\n<p><strong>Personal budget&nbsp;<\/strong><\/p>\n<p>A common mistake made by business owners is to forgo paying themselves any wage. But no one can (or indeed should) work for free. Don&rsquo;t sacrifice your financial wellbeing for a small uplift in business performance.<\/p>\n<p>Instead, tot up the amount you normally spend each month to support yourself and your family, and balance that with your average business bill. Think about areas like:<\/p>\n<ul>\n<li><strong>Pension contributions<\/strong><\/li>\n<li><strong>Mortgage or rent payments<\/strong><\/li>\n<li><strong>Household energy bills<\/strong><\/li>\n<li><strong>Holiday savings<\/strong><\/li>\n<\/ul>\n<h3>When\/can I increase my salary?<\/h3>\n<p>It can take months &ndash; or, for startups, years &ndash; for new businesses to start turning a profit. In the interim, most entrepreneurs will pay themselves the bare minimum. But once profits are consistent, and your household bills are covered, you can begin considering a salary raise.<\/p>\n<p>It&rsquo;s crucial to increase your salary or business drawings incrementally, rather than slapping another zero onto your payslip.<\/p>\n<p>Industry benchmarking is a common technique for evaluating employee salaries. And this is perfectly relevant for directors too. You can estimate competitor salaries by looking at their company&rsquo;s sector turnover data. Or, simply asking fellow business owners in your <a href=\"https:\/\/startups.co.uk\/strategy\/the-ultimate-guide-to-networking\/\">network<\/a>.<\/p>\n<p>Be cautious to leave yourself a buffer. Breaking even is a vital milestone for businesses, but it shouldn&rsquo;t be your main goal. Healthy growth means increasing profits year-on-year.<\/p>\n<p>Best practice dictates that firms should keep enough cash in an emergency fund to cover business expenses for three to six months. This is important to have in case of another pandemic or Brexit scenario. It also protects the company if you have to take sick leave.<\/p>\n<p>The temptation of being your boss is to award yourself a big windfall when the business starts to do well. Where possible, keep it in the bank. Staying conservative on pay will fatten up the rainy day fund, ensuring you keep earning now, and in future.[\/vc_column_text][\/vc_column][\/vc_row]<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>[vc_row][vc_column][vc_column_text]Deciding how much to pay yourself as a business owner is a tricky process. With the stresses of running a company, there&rsquo;s a temptation to reward your efforts with a big payday. But this would directly eat into your profits, overheads, and &ndash; if you&rsquo;ve a team working under you &ndash; your wider employee payroll. [&hellip;]<\/p>\n","protected":false},"author":91483,"featured_media":158351,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[2996,4224],"tags":[],"acf":[],"yoast_head":"\n<title>How To Pay Yourself As An Employer - Startups.co.uk<\/title>\n<meta name=\"description\" content=\"We explain how to pay yourself based on business structure including details on tax requirements, HMRC compliance, and profit calculations.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/startups.co.uk\/people\/payroll\/how-to-decide-how-to-pay-yourself-in-your-business\/\" \/>\n<meta property=\"og:locale\" content=\"en_GB\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"How To Pay Yourself As An Employer - Startups.co.uk\" \/>\n<meta property=\"og:description\" content=\"We explain how to pay yourself based on business structure including details on tax requirements, HMRC compliance, and profit calculations.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/startups.co.uk\/people\/payroll\/how-to-decide-how-to-pay-yourself-in-your-business\/\" \/>\n<meta property=\"og:site_name\" content=\"Startups.co.uk\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/startups.co.uk\" \/>\n<meta property=\"article:published_time\" content=\"2002-12-20T11:37:00+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2024-04-05T00:00:00+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/images.startups.co.uk\/wp-content\/uploads\/2002\/12\/Pay-day.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1500\" \/>\n\t<meta property=\"og:image:height\" content=\"1000\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Helena Young\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@startupstowers\" \/>\n<meta name=\"twitter:site\" content=\"@startupstowers\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Helena Young\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"8 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/startups.co.uk\/people\/payroll\/how-to-decide-how-to-pay-yourself-in-your-business\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/startups.co.uk\/people\/how-to-decide-how-to-pay-yourself-in-your-business\/\"},\"author\":{\"name\":\"Helena Young\",\"@id\":\"https:\/\/startups.co.uk\/#\/schema\/person\/df7a45df2f532172a027cd47886bbbeb\"},\"headline\":\"How to pay yourself as a business owner\",\"datePublished\":\"2002-12-20T11:37:00+00:00\",\"dateModified\":\"2024-04-05T00:00:00+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/startups.co.uk\/people\/how-to-decide-how-to-pay-yourself-in-your-business\/\"},\"wordCount\":1684,\"commentCount\":0,\"publisher\":{\"@id\":\"https:\/\/startups.co.uk\/#organization\"},\"image\":{\"@id\":\"https:\/\/startups.co.uk\/people\/payroll\/how-to-decide-how-to-pay-yourself-in-your-business\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/images.startups.co.uk\/wp-content\/uploads\/2002\/12\/Pay-day.jpg\",\"articleSection\":[\"Hiring and managing staff\",\"Payroll\"],\"inLanguage\":\"en-GB\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\/\/startups.co.uk\/people\/payroll\/how-to-decide-how-to-pay-yourself-in-your-business\/#respond\"]}],\"copyrightYear\":\"2002\",\"copyrightHolder\":{\"@id\":\"https:\/\/startups.co.uk\/#organization\"}},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/startups.co.uk\/people\/how-to-decide-how-to-pay-yourself-in-your-business\/\",\"url\":\"https:\/\/startups.co.uk\/people\/payroll\/how-to-decide-how-to-pay-yourself-in-your-business\/\",\"name\":\"How To Pay Yourself As An Employer - 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