So many business owners don’t prioritise paying themselves, even though the whole reason they decided to go self-employed was to make money!
The consequence is that they end up miserable, behind on their personal bills, contemplating going back into employment because they need the safety of a regular wage.
Or, even they don’t continue being self-employed, they draw money without any tax planning and end up paying more tax than they should.
In this guide, I’ll show you create a way to pay yourself that is good for you and that will keep your business financially stable.
Pay Yourself a Regular Wage
I see many business owners dipping into their business bank account as and when they need money without any thought for cashflow, upcoming bills and taxes.
In worst cases, with irregular money hitting their personal bank account, they miss payments affecting their credit rating.
But the most common outcome is that these random withdrawals are not tax-efficient.
Paying yourself a regular wage protects you from missing payments. It’s also good for your well-being because you can pay for dinner with your friends or impulse buy a new dress without the guilt of making a transfer from your business on your phone.
You owe it to your business to be in the best mindset you possibly can and if you’re feeling guilty about regular spending, having a treat or behind on your credit card payments, your work will be affected.
After all your business owes it to you to pay you a regular salary that compensates you for all the hard work you do.
How Much Should You Pay Yourself?
The amount you should pay yourself depends partly on your personal and business circumstances.
There are three main options that you can choose from:
Option 1: Pay Yourself What Your Business Can Afford
If your business is in its early stages, sales may be low or you might be covering start-costs meaning there isn’t much left-over to pay you the level of salary that you may want.
Some new business owners choose not to take any salary at all, instead treating their time as their investment.
This is fine for those that have personal savings or other forms of income. But if you do not have this, do not to leave yourself struggling to pay your bills.
If your business is new, create a start-up budget that includes a wage for yourself to give you the breathing space to get your business up and running to full capacity.
Alternatively, you may want to pay yourself a salary that takes almost all the profit out of your business. If you choose this approach make sure you budget for your tax bill so there is enough left behind to clear this bill.
Option 2: Pay Yourself What You Need
Another option is to pay yourself exactly what you need to cover your personal bills like car payments, rent and food.
People tend to choose this option if:
- They are starting a new business and want to invest their time in setting it up rather than take a salary;
- Want to save money up in their business rather than putting it all in their account;
- Want to defer a larger tax bill to later years;
Set up a Personal Budget to check what you need to take as a salary.
Option 3: Pay Yourself What You Would Be Paid if Your Were Employed
Another option is to pay yourself what you would be paid if you worked for someone else.
That way you be fairly remunerated for what you do and can reinvest any profits back into your business.
Whatever option you choose always have your business’ best interest at heart. There is no point destroying the thing that is paying you and all your hard work.
How to Pay Yourself
How you pay yourself depends on your business’ legal structure. Let’s look at the two most popular UK business structures – self-employed (sole trader) and Limited Company.
If You Are Self-Employed
When you are self-employed all the money left after your business expenses and taxes belongs to you.
It’s up to you to choose how much you take from your business bank account and when.
As a sole trader, you can pay yourself with a simple bank transfer from your business bank account to your personal account. You’ll need to make sure you have the cash in the account to do so.
If you are using my bookkeeping spreadsheet, you can add your salary payment at the start of the month to check whether there will be enough money in your account to pay you.
If there isn’t it, you can take action early in the month to make sure there is enough such as chasing overdue invoices early and slowing down supplier payments.
If You Have a Limited Company
As a Limited Company owner you need to pay yourself by either PAYE salary, dividends or a combination of both.
If you choose to pay yourself with dividends you’ll need to make sure you have sufficient reserves to cover the payments.
Getting your combination of salary and dividends just right can be incredibly tax efficient.
If you have a Limited Company it is a legal requirement that you have a separate business bank account. So every time you pay yourself you’ll need to transfer money from your business account to personal account.
How to Record Your Salary Payments in Your Bookkeeping
If You Are Self-Employed
As a sole trader, all the payments you make to yourself are considered drawings.
You’ll pay tax on all your profits regardless of whether you draw it out or not, so that means your salary is not a tax deductible expense.
If you’re using my bookkeeping spreadsheet for your bookkeeping it will automatically estimate your tax bill so you know how much to put away each month.
If You Have a Limited Company
When it comes to bookkeeping, you’ll show your PAYE salary as a business expense and claim tax relief on it.
You’ll need to record your dividend as a cost in your profit and loss account, after all your business expenses and corporation tax in your annual accounts.
Budgeting For Your Tax
You’ll need to pay personal tax on the money from your business, either as a dividend or if you’re self-employed.
Your tax bill will continue to build up each and every time you take money so it is important to budget for your tax bill.
This can be tricky because estimating your tax bill isn’t straight-forward. I’ve put together a guide where I show you how you can make this estimation and reliable budget for your tax
New Here? These are my most popular resources:
- The Ultimate Bookkeeping Spreadsheet – Organise your money, track the numbers that matter and stay on top of your cash;
- FREE Guide: 11 Common Small Business Setup and Tax Mistakes – Are you worried your business isn’t set up correctly? Use this guide to identify whether you’re making the 11 most common financial pitfalls I’ve seen when it comes to setting up a business and taxes, as well as finding out how you can put them right;
- Sole Trader or Limited Company? – Download my free calculator to check which business structure would help you to pay less tax;
- FREE Business Expenses Cheatsheet – Check what you can and can’t claim as an expense against your taxes.
- 6 Core Elements of Self-Employment Taxes – Confused by taxes? Worried you’re missing something when it comes to tax allowances and reliefs? These easy to follow 6 mini-guides will have you on top of the tax side of things in no time at all.