When you’re starting out in business, your number one priority is getting customers. However, once you start making money, there’s an inevitable question you need to answer:
How do I pay myself?
I found this bit of starting a business really nerve-wracking. I didn’t want to make a mistake and have HMRC on my back for doing it wrong. I wasn’t sure if I should be set up as sole trader or a limited company and I also had no idea how much money I was going to make each month and whether I could pay myself a set ‘wage’.
In this moment of fear and doubt, I turned to a couple of my ex-colleagues who were freelancing to find out what they did. Luckily, they were really open with me. They told me how they set up their companies and managed their finances and also gave me recommendations for accountants to talk to.
Whilst you absolutely need to get professional advice for your own circumstances, listening to other people’s experiences can alleviate the fear and help you understand your options. This is why I’ve gathered some tips from a range of entrepreneurs who are happy to share how they pay themselves:
“I have a separate ‘salary’ bank account where I transfer a percentage of each invoice. At the end of the month, on my made-up payday, I pay myself a ‘wage’ from this pot. Any extra funds stay in this account which means that I can take a paid holiday or sick leave.”
Claire Jones, Loud and Clear Accounting
“When an invoice is paid, I keep 25-30% in an account to pay tax, NI and pension contributions. I then transfer the rest to a savings account. Once a month I pay myself a set ‘salary’ from this savings account.”
Liz Loly, Communications and Education Consultant
“I have several different accounts allocated for different things: my salary, tax, operating costs and profit. It’s helped me reduce my operating costs from 95% to 20% this year.”
Jessica Fearnley, Business Coach
“I submit my tax return at the beginning of April and then divide the amount owed into 10 equal payments which I pay on standing order to HMRC on a monthly basis to clear it by January.”
Rachel Van Walsum, Virtual Assistant
“I have separate bank accounts for life, business and tax. When I started 14 years ago, I followed the one-third/two-thirds rule like many others in terms of what I took as pay. I quickly moved to taking pay based on my household budget so I could build a reserve in my business account for clients who pay late, work I have to write off, quiet times and emergencies.”
Adrian Ashton, Social Enterprise Advisor
“I operate as a limited company so obviously have separate bank accounts. I pay myself PAYE at the minimum level to get pension credit and then distribute profit after tax as dividends. Obviously, I have to pay tax on self-assessment on dividends above the allowance.”
Alan Fuller, Fullworks Security
“I have a business account and a business savings account. I transfer cash into business savings for tax etc. and pay myself a salary from my business current account each month. That way it gives me a target to meet in terms of sales and turnover. The leftover is bonus or profit to carry over.”
Dan Richards, Actor and Voice Artist
And in the spirit of sharing here’s what I do, as a sole trader:
“I have one bank account which has the functionality to set savings goals and ‘ring-fence’ money from the total balance to contribute to those goals. I set aside at least 30% of invoices for tax and NI and 10-20% for expenses. I use the rest of the balance as I would if it were a salary.”
Jen Smith, Copywriter
Whilst the majority of the advice our entrepreneurs have shared here would work whether your business is set up as a sole trader or limited business (the most common legal structures for UK businesses), there are some fundamental differences and it’s vital you consider the benefits and risks of both.
You might also be wondering whether you need a business bank account or not? As a sole trader, it’s not a legal requirement to have a separate business bank account but it is usually a good idea to help you manage your finances. It’s vital if you’re setting up as a limited business. Don’t worry, they don’t have to cost the earth! In fact, there are many free business bank accounts to choose from and we have compared the best to help you choose.
If you’ve been inspired to re-think the way you manage your business finances or feel like you’ve more options available than you first thought, we strongly recommend seeking advice from a qualified accountant. The information shared here does not constitute financial advice, does not take into account your specific circumstances, and should not be acted on without full understanding of your specific situation and seeking professional financial advice.