Whether you are a small business owner, a limited company, a sole trader, or involved in a business partnership, there are many responsibilities involved. One of the key aspects is understanding how to pay yourself. You deserve a salary too, right?
It’s crucial to strike the right balance between reinvesting profits into your business and ensuring your personal financial stability. At LJS Accounting Services, we recognise the importance of this topic for entrepreneurs.
This blog serves as a guide to walk you through various methods and considerations for paying yourself as a business owner.
With our advice, you can make informed decisions about your income distribution and set yourself up for financial success.
The Importance of Paying Yourself
As a business owner, you might be tempted to reinvest all profits back into your business. While reinvestment is vital for growth, paying yourself is equally essential.
Not only does it recognise your hard work and efforts, but it also ensures your personal financial well-being.
Regular salaries offer stability, enabling effective personal expense management and future planning.
Whether you prefer monthly, biweekly, or quarterly payments, our talented team can help you establish an efficient payroll system that ensures timely and accurate payments.
Understanding Your Business Structure
Before deciding on the best method to pay yourself, it’s crucial to understand your business’s legal structure.
Sole proprietors, partnerships, Limited Liability Companies (LLCs), and corporations have different tax implications and regulations concerning owner’s compensation.
Seeking guidance from LJS Accounting Services can help you identify the most tax-efficient approach based on your business structure.
Setting a Reasonable Salary
When deciding on a salary for yourself, it is important to find a balance between your personal financial needs and what your business can afford. Generally speaking, you should only pay yourself from profits rather than from your income.
Setting an excessively low wage might lead to financial strain, while an excessive one could adversely affect your business’s cash flow, therefore balance is key.
LJS Accounting Services can assist you in analysing your business’s financial health to determine a suitable and sustainable salary allowance.
Paying Yourself From Your Business
How you pay yourself from your business is determined by its structure. For partnerships and self-employed individuals, drawings can be taken directly from the business, with careful consideration for future costs and tax obligations.
On the other hand, directors of limited companies typically receive a combination of salary and dividends as they fulfill both employee and company owner roles.
To manage your personal earnings efficiently, consider setting up business savings accounts alongside your current account, or consider a business credit card, to segregate funds and business expenses for income tax bill, VAT payments, investments, and other purposes.
Paying Yourself if You Are Self-Employed
If you’re a sole trader, commonly known as being self-employed, the money you earn is yours to use however you want. Paying yourself when you’re self-employed is simple.
Some people use one bank account for everything, so they just spend the money they earn from the business. Others have separate accounts and move money between them.
It’s a good idea to have separate accounts to keep yourself organised. Consider a business credit/debit card.
And remember, make sure to keep all the records you need as a self-employed person. That way, you stay on top of things and meet regulatory obligations.
Proof of payments and expenses will be a necessity when filing for paying tax returns at the end of the tax year if applicable so make sure to keep a copy of all invoices, receipts, and proof of purchase.
Paying Yourself in a Business-Partnership
If you are doing business with another person, this is known as a ‘business partnership’, which involves the profits being divided among the people in the partnership. This is how partners will receive their wages.
You should have agreed on the percentage of shares before business, which should be available in the business contract.
All partners are responsible for keeping specific business records, even though one partner may be designated to handle the record-keeping.
Paying Yourself From a Limited Company
Paying yourself in a limited company can be more intricate, and there are additional record-keeping obligations involved. If you wish to receive a salary, expenses, or benefits from the company, you must register it as an employer.
Once registered as an employer, the company is responsible for deducting income tax and National Insurance contributions from your salary payments through the pay-as-you-earn (PAYE) system and reporting them to HM Revenue Customs (HMRC).
To handle this procedure, you have two options: establish an in-house payroll department or outsource it to professionals such as an accounting firm.
Whichever option you select, you can be confident that the payroll function will follow rules, keep accurate records, and ensure timely deductions and payments of income tax and National Insurance.
This may sound like a painfully thorough process, which is why choosing the right accountant with extensive pre-exsisting knowledge and experience can make life easier.
For small companies with a payroll function, coordinate with your accountant or payroll function to withdraw the appropriate amounts for your payment from the business account.
Besides a salary, you have the option to compensate yourself with a dividend from the available profits (known as a dividend). Dividends are not deductible as business costs to pay corporation tax, and they usually need to be paid to all shareholders.
To decide dividends, a formal director’s meeting is required. You should generate a minute to keep track of the important points raised in the meeting, or seek your accountant’s help, then pay yourself from your bank account.
Understanding the uk tax implications of your personal income is crucial for both personal and business finances.
As a business owner, you may need to pay self-employment taxes on your salary.
LJS Accounting Services can guide you through tax planning strategies to minimize your tax liability and ensure compliance with UK tax laws.
Paying yourself as a business owner is a critical aspect of managing your finances effectively.
As you continue on your entrepreneurial journey, let us be your trusted advisors, ensuring that you strike the right balance between business growth and personal financial stability.
Contact LJS Accounting Services today and empower yourself with the knowledge and support you need to achieve financial success as a thriving business owner.