How much should I pay myself?
An important question for all small business owners, too much and you may cause trouble for your business, too little and you will struggle to survive. It is essential to find the perfect balance.
Author: Charlotte Cobley
Learning to manage and grow a business gets tougher. But knowing how much to pay yourself is a really difficult issue to tackle.
The three golden rules:
- The golden rule above all others is to pay yourself from the actual profits. Figures can look great as they flow through the bank account. Consider this: they are NOT available funds. Why not? Well have you considered taxes, national insurance contributions, fixed costs, overheads and any pay roll? That’s exactly why you cannot take a large slice of the pie.
- Consider money for growth is very valuable. If you extract it from the company then that money is lost to business growth, development and investment. In addition the money you extract will be taxed. If it’s left within the business you may find it is untaxed. There is a distinct possibility it may well be offset. So it makes sense to leave it just where it is if you can.
- You’ve gone into business to make money, to improve your life and do something you love. If you are putting in long hours and there is no monetary reward you can be left feeling resentful and stressed. So a balance between relieving stress in your personal finances are keeping your business healthy needs to be struck. One of the mistakes is not to pay yourself regularly. It’s something new business owners fail to do. However, withdrawing large sums sporadically can ring alarm bells to the tax office and you never know whether a full audit might follow.
So how much should you pay yourself?
Firstly you need to work out what other people are being paid who provide a similar service. Base your figure on your research. Then decide what the business can afford and also what is the true value of your time.
The type of business structure you have in place will dictate what you can pay yourself. If you are a sole trader then you are not accountable to anyone. You can pay yourself what you like. But bear in mind the first point that all revenue is NOT available for your salary.
Check with your accountant before you decide to do anything.
Make sure your salary does not compromise your tax position. It pays to be tax efficient. There are five main ways to do this. You can be paid a straight salary, or balance your salary with dividend payments. Perhaps consider being paid with stock or stock options. You might want to consider a salary and a bonus payment once a year. The other way is to write an agreement where it is understood you will be paid at a later date. Do check on the status of your business before taking a salary or dividend from your company.
Be aware that there are times where you may not be able to pay yourself anything at all if your business is struggling. This is the risk you have to take when setting up a business. The rewards may be great but there is risk attached to any venture. If you are in debt or you have employees to pay then it really isn’t appropriate to pay yourself first. Click here to find out more about profit percentages and no compensation
The rule is, when you do what you love it doesn’t feel like work. However, that’s not a reason not to get paid.