Setting up a company is both stressful and exciting, you’re the owner of your very own business. Something you’ve built and something you have autonomy over. You can hire who you want, you can operate your way and the money is yours. However, what a lot of people underestimate is how important it is to pay yourself a salary from said money. There are many benefits to paying yourself a salary, most importantly it makes it easier for you to track your company finances and allows you to budget in your personal life too. As well as this, paying yourself a salary from your company means that you will find it easier to maintain tax efficiency. Even though you may see the money of your company as yours, in the eyes of the government you’re two separate entities. We always advise our clients to separate their business and personal finances. It helps to distinguish the two, and if you know you can often be over indulgent financially in your personal life, it can help maintain healthy finances for your business.
Depending on your circumstances, there are a number of ways that you can pay yourself a salary when you own your own business. Firstly, remember that when you incorporate a company it then becomes a separate entity to you personally. This basically means that profit coming through isn’t automatically given to you. This is because the company has its own liabilities that it’s accountable for. When you take this into account, it makes paying yourself more complex. You can pay yourself as much as you like from your business. Be considerate of other costs that you’ll need to pay from the business, such as employee wages, loan payments and other bills your business will incur. Just as you would with an employee, consider experience, qualifications, responsibilities, the time you spend at work and what you’re paying other workers when you’re determining your salary.
In this blog post we’ve listed all the ways that you can pay yourself as a company owner and how they’ll impact you and your business.
PAYE = Pay as you Earn.
PAYE is a government managed scheme meaning that HMRC are able to collect income tax from the employer. If you have previously worked for a company not owned by yourself, this will have been the system they used to pay you and in turn take tax from your wage. PAYE is probably the most common way of paying/being paid.
Choosing this option means that you’ll need to decide upon the gross amount of income that you want to pay to yourself as your salary. Next, you’ll need to calculate the total of income tax and National Insurance you owe and will therefore deduct from the amount that you decide to pay yourself. Once you’ve done this, you’ll be left with a net amount that you can pay yourself from the company for your salary.
If your company has employees other than yourself and any joint owners, you will need to use PAYE to pay them. You’ll also need to make monthly returns to HMRC to keep up with real time payroll figures.
Dividends = Payments that are made to shareholders in a company from the company’s profits.
If your company hasn’t made any profits then you won’t be able to pay dividends. Dividends are normally paid once or twice per year to shareholders who have made investments in the company or are directors of the company.
The way dividends are taxed is through corporation tax paid on profits by the company. Being divided between shareholders raises a tax liability for each individual via income tax. However, tax paid on dividends is typically lower than income tax. It’s 7.5% for basic rate, higher rate is 32.5% and 38.1% for additional rate payers. There is an allowance for dividends however, there’s an allowance of £2000 which is receivable before you pay any tax on your dividends.
Like everybody, as a company owner you don’t want to be paying more tax than you need to. It could be worth taking the personal allowance for income tax (£11,850) and the dividend allowance (£2000) into consideration when making your decision on how to pay yourself a salary. These figures have changed since the 17/18 tax year where they were £11,000 and £5000
Remaining tax efficient is commonly achieved by only paying yourself a small salary via PAYE and withdraw the rest via dividends. The reason for this is that you will be taxed more on income tax than you would through dividend tax. Your individual circumstances will be a factor in this. It’s always worth getting advice from an accountant to see what will work best for you and your company.
Many of our clients are business owners and we advise them all on the best way to ensure they’re tax efficient. If you’re struggling with paying yourself as a company owner, get in touch today!