Virtually all employees just take home a monthly payslip and have nothing more to think about, a business owner salary can be paid in many different ways, which can often become quite confusing and time-consuming. However, with a little financial planning, you can save yourself a lot of money.
What should your salary be?
As a business owner, there are some standard ways of working out roughly what you should be taking home each month. If you’ve only just begun running your business, you need to first draw up a complete list of all your current outgoings:
- Rent/mortgage
- Bills and utilities
- Food, clothes and other essentials
- Debts
Initially, you need to work out what you need to pay yourself monthly to get by on, and stick to this amount until you start breaking even or making a profit.
Once you start to see a profit, it can be tempting to go and splash out a little more than usual. However, to maintain stability, it is important that you continue to pay yourself a wage based on your basic worth.
What is my basic worth?
If relevant, write down your last salary as an employee – say £25K
Multiply the rate of inflation by three or four (9% as of June 2017) – say 8.7%
Add this percentage to your previous salary – 25 X 1.087 = £27,175
Why add the inflation rate at all? Why not just keep paying yourself your market worth? Essentially, the pay ‘rise’ is a way of recognising that running a business involves extra responsibilities. Working that number out by using the inflation rate offers a more stable way of estimating your salary than just choosing a random number.
Of course, as you grow, you should pay yourself more – you deserve it after all.
How to pay your business owner salary?
The way you pay yourself depends on how you set up your business: as a sole trader or as a limited company. Let’s look at your options for each approach:
- Sole trader
If you’ve decided to set yourself up as a sole trader, you’re normally free to draw as much money from the business as you want, whenever you want. This is by far the simplest way for entrepreneurs to manage their money, although it’s not necessarily the most tax efficient. You should aim to put aside at least 25% of all your earnings in a separate bank account in order to pay the tax man.
It’s sensible – though not obligatory – to pay yourself a regular salary as a Sole Trader, and reinvest the rest of the money in the business or save it for a rainy day.
- Limited company
As a limited company, the business owner salary must be paid through Pay as You Earn (PAYE) – you have to let HMRC know that this is what you’re doing on their website. You will then be on the company payroll – even if you’re still trading as a lone freelancer or consultant. You will be paid monthly through PAYE, National Insurance Contributions (NIC’s) start at £8,164 and income tax at £11,850.
One of the most common approaches small business owners take is to balance their salary with dividend payments. In this approach, you’d typically take home a small monthly salary, then pay yourself ‘shares’ from profits the business generates. By giving yourself a low salary and instead paying yourself Dividends from the business’s profits, you would hand over less in tax than if you paid yourself a standard salary.
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Either way, according to job site Indeed, the average UK business owner salary is just under £38K – almost £10K more than the average for employees. Making the most of your self-employed benefits is often the trickiest part, and often requires professional support.
Speak to one of our Sidekick’s for support on the best approach for you, the most important factor whichever choice you make is that you declare everything correctly to HMRC.
For more advice get in touch with Sidekick today for guidance on the right approach for your business.
