How to Pay Yourself as a Business Owner—The Smart Way

2 Jan

Running a business is no small feat. You’re juggling sales, expenses, and maybe even a team—but when it comes to paying yourself, are you doing it the smart way? Many business owners either underpay themselves (hello, martyr complex) or drain their business accounts dry. Let’s break down how to pay yourself strategically, so both you and your business thrive.

1. Salary vs. Dividends: What’s the Difference?

As a business owner, you have two main ways to take money out of your business: a salary or dividends.

Salary: This is a set amount you pay yourself regularly, like an employee. It’s subject to income tax and National Insurance contributions (NICs), but it counts as an expense for the business and is offset-able against corporation tax.
Dividends: These are payments made from your company’s profits. They’re taxed differently, often at a lower rate, but you can only pay dividends if the company is making a profit - these are subject to corporation tax.

Pro Tip: Many owners use a mix of salary and dividends to minimise taxes while staying compliant.

2. Take Advantage of Tax-Free Allowances

Don’t leave money on the table! The UK offers several allowances you can use to reduce your tax bill:

Personal Allowance: You can earn up to £12,570 tax-free. Structure your salary to stay within this limit.
Dividend Allowance: The first £1,000 of dividends is tax-free.
Employer NIC Threshold: Pay yourself just below the NIC threshold to reduce payroll taxes.

Pro Tip: Work with an accountant to ensure your pay structure maximises these benefits.

3. Build in Employee Benefits (Yes, for Yourself!)

As a business owner, you can give yourself perks that are tax-efficient and beneficial.

Pension Contributions: Your company can contribute to your pension, reducing taxable profits.
Company Car: Opt for an electric vehicle to take advantage of low Benefit-in-Kind (BIK) rates.
Health Insurance: Provide yourself with private medical cover through the business.

Pro Tip: Perks like these often cost the business less than paying the equivalent amount in salary.

4. Keep Some Profits in the Business

It’s tempting to take all the profits out of your company, but leaving some cash in the business can provide a financial cushion.

Use retained earnings to invest in growth (e.g., new equipment, marketing, new hires, expansion).
Maintain a cash buffer for unexpected expenses or opportunities.

Pro Tip: Keeping profits in the business can also reduce your Corporation Tax liability.

5. Plan for the Future

You’re running the business now, but what about tomorrow? Paying yourself smartly includes planning for the long term.

Pension Contributions: Ensure you’re building your retirement fund.
Emergency Fund: Create a personal safety net separate from the business.
Succession Planning: Consider how you’ll exit the business and what financial strategies you’ll need in place.

Final Thoughts

Paying yourself as a business owner isn’t just about taking money out; it’s about doing so in a way that benefits both you and your company. With the right strategy, you can minimise taxes, secure your future, and reinvest in growth. Remember: you didn’t start a business to work for free, pay yourself what you’re worth.

p.s not advice obvs!

Katrania Lowers