How much should I pay myself as a business owner?

Choose the right business structure

Before deciding how much to pay yourself, it’s important to understand how your business is structured because the way you take money from it depends on whether you’re a sole trader, a partner or a company director.

If you are a sole trader, you don’t pay yourself a salary. Instead, you can withdraw money from the business whenever you need to. These withdrawals are known as drawings and don’t affect the amount of Income Tax or National Insurance you pay. Instead, you’ll pay tax and National Insurance on your business profits, regardless of how much money you take out.

If you are a partner in a business partnership you’ll also take money from the business as drawings. You and your partners will each pay Income Tax and National Insurance on their share of the partnership’s profits, rather than on the amount they withdraw.

If you run a limited company, you’re legally separate from the business. If you’re also a director, you may pay yourself a salary through PAYE and you may also receive dividends if the company has sufficient profits available for distribution. Salary and dividends are taxed differently, so many directors choose to receive a combination of both.

What about dividends and payroll?

Dividends are only available if your business is a limited company and you own shares in it. Sole traders and partners cannot pay themselves dividends.

If you’re a company director, you may choose to receive income as:

• a salary, paid through PAYE, and/or
• dividends, if the company has sufficient distributable profits after Corporation Tax.

Many directors choose a combination of salary and dividends because they are taxed differently. Dividends are not subject to National Insurance, although they may be subject to Dividend Tax.

Unlike salaries, there is no requirement to pay dividends on a regular schedule. However, each dividend must be properly authorised and supported by sufficient distributable profits. It’s also important to keep accurate records of any dividends paid.

Because the most tax-efficient approach depends on your company’s profits and your personal circumstances, it’s a good idea to speak to your accountant or tax adviser before deciding how to pay yourself.

In summary; the way you take money from your business depends on its structure:

• Sole traders take drawings from the business and pay tax on their profits.
• Partners take drawings and pay tax on their share of the partnership’s profits.
• Company directors may receive a salary through PAYE and, if they’re shareholders, dividends from the company’s distributable profits.

Set a sustainable payment strategy

Whether you’re a sole trader, partner or company director, it’s a good idea to decide how you’ll take money from your business and review it regularly.

If you’re a company director and pay yourself a salary, running a regular payroll makes it easier to:

• budget for your personal income
• manage your business cash flow
• meet your PAYE reporting obligations
• keep accurate accounting records.

Dividends can only be taken when your company has sufficient distributable profits available and should be supported by appropriate company records, even if you’re the only shareholder.

Review the amount you pay yourself regularly as your business grows, because any changes should take account of the company’s profitability, cash flow and future plans, as well as your personal financial needs.

Decide how much to pay yourself

There isn’t a set correct amount to pay yourself. The right level depends on your business’s profitability, cash flow and your own financial needs.

When deciding how much to take from your business, consider:

• your essential personal living costs
• how much profit your business is making
• the cash the business needs to pay suppliers, employees and taxes
• planned investment in future growth
• the way your business is structured (sole trader, partnership or limited company).

Avoid taking more out of the business than it can comfortably afford, particularly if doing so could affect its ability to meet future liabilities.

Review your drawings, salary or dividends regularly as your business grows:

• Sole traders and partners can usually increase or reduce their drawings as business performance changes, remembering that Income Tax and National Insurance are based on profits rather than drawings.
• Company directors should review their salary and any dividends regularly to make sure they remain appropriate for the company’s financial position and tax circumstances.

How can I make sure I’m paying myself tax efficiently?

The most tax-efficient way to pay yourself will depend on your business structure, your level of profits and your personal circumstances. What works well one year may not be the best approach the next, so it’s worth reviewing regularly.

If you run a limited company and pay yourself dividends, make sure the company has sufficient distributable profits before declaring them and keep appropriate company records to support any dividend payments.

If you’re unsure how much to pay yourself or how to balance salary, drawings or dividends, speak to your accountant or tax adviser. They can help you choose an approach that suits your business while ensuring you meet your tax obligations.