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You might assume that being a small business owner is living the life of Riley. After all, you’re in control of how much you take home at the end of each month.
But while you might think that’s a luxury, taking a wage as a start-up or small business owner can actually come with far more complications than initially anticipated.
Knowing how and when to pay yourself once the money starts rolling in is key to the longevity of your small business management success.
Of course, ‘reinvest all the money you make at the start’ is a line straight from page 1 of Generic Business Tips 101.
We understand that it simply isn’t feasible for some small business owners to forego an income for months (or years!) - luckily, that’s where today’s post comes in to demystify this important topic.
How much should I pay myself?
It can be challenging to break down exactly how much you should pay yourself as a small business owner. A fair and optimal amount is often dependent on a range of factors, such as:
Data on how much small business owners pay themselves on average isn’t readily available. Still, as you begin trading and your business begins to grow, you’ll better understand the accuracy of your financial forecasts compared to your actual cash flow and profits. This, in turn, helps you calculate a safe and modest wage to take from the business each month.
This personal income can always be topped up as your business grows and becomes more profitable.
Don’t forget about smart money moves such as paying into a pension - paying in a set percentage each month will ensure this fund continues to tick over. This can easily be overlooked by small business owners with little or no experience paying themselves.
How do I pay myself?
Ultimately, this will depend on the structure of your business.
Where partnerships and self-employed workers can take their earnings directly from the business, it can be a little more complex for owners of a limited company.
Directors are often classed as both an employee and an owner, meaning they take their pay from salary plus dividends.
Of course, for you to pay yourself a salary, expenses or benefits, you’ll need to register on your company’s payroll. This means, as with your employees, an owner’s monthly pay will be subject to pay as you earn (PAYE) Income Tax and National Insurance.
Owners of smaller and younger companies without payroll can pay themselves by drawing funds directly from the business account.
In addition to paying themselves through a monthly salary, small business owners can also pay themselves a dividend from the business profits. This can’t be classed as a business cost when calculating Corporation Tax and will usually have to be paid out to all shareholders.
It’s important for small business owners to try and separate their own finances from their business’s finances whenever possible.
This, in theory, ensures both a functional home and business budget that isn’t dependent on the other. To back this up, it’s always good to have a rainy day fund for your business - a cash reserve that minimises the need for you to dip into your own pocket to cover unexpected business expenses.
This is where recruiting the specialist insights and opinions of an accountant or bookkeeper can come in particularly handy, helping map out a financial plan that works for you both personally and professionally.