08 Jan How much should you pay yourself as a business owner?
Starting your own business means doing something you’re passionate about. However, at the end of the day, the main idea is to also make a living out of it. As a business owner, you need to decide how much money you want to pay yourself. If you pay yourself too little, you may struggle to survive. If you pay yourself too much, you may put your business at risk. Finding the right balance here is key. So let’s have a look at what to consider when deciding on your own salary.
Setting your own salary may sound like a dream come true to most but every business owner knows that the reality is a bit more complicated. Your wage cannot come out of your revenue or turnover - there are quite a few other business costs you must consider.
Before you take your cut, you need to deduct business expenses like fixed and variable costs, taxes, overheads, administrative costs and so on. Then once you know your profits, you need to consider other factors, such as your business objectives, how much you want to earn, the industry that you are in, the possible risks, etc. All of these things considered should land you on a more realistic figure.
What a reasonable compensation is really varies from situation to situation. What is reasonable in one country or a business sector, may be completely irrational for others. However, there are a few different considerations that could help you understand what is “reasonable”.
- How much do similar businesses pay for the work you do in your role?
- What do recruitment agencies offer to pay for people in your position?
- Is your pay directly related to the amount of time you spend on working?
- Does your pay seem fair when compared to your employees’ salaries?
- Does your pay seem fair when considering the level of responsibility and the amount of work you need to handle?
- How much do other business owners of similar companies to yours pay themselves?
Understand your value
While you should be realistic and reasonable with your salary, you should also never undervalue yourself. Many starting businesses don’t generate much profit, however, it doesn’t mean that you shouldn’t pay yourself at all. You may want to use that money to invest back in the company and ensure steady growth, but if it means that you will be struggling financially yourself - it is not worth it. Financial issues are one of the biggest causes of stress, lack of motivation and dropped productivity. Being stressed about surviving will only affect your company negatively and make it more difficult for you to make important business decisions.
The time and effort you put into your business should be acknowledged when setting your own salary. You need to find the balance that allows you to live comfortably yet not cause much harm to your business.
Pay your own salaries regularly
Once you decide on the salary, put yourself on the payroll and set up regular payments just like to any other of your employees. It is important that you stick to this from the very start and then increase your salary together with business growth.
Adding yourself to the payroll will look much better to your employees as opposed to taking out a large sum of money from the funds once in a while. It is also a lot more acceptable in the eyes of the government - large irregular payments to yourself may look suspicious and even lead to a tax audit of your company.
Pay yourself in the most tax efficient way possible
When paying yourself a salary, don’t forget that several tax obligations will have to come out of it, such as Income Tax and National Insurance Contributions.
Depending on the legal structure of your company, there may be some more tax efficient ways to pay yourself. If your business is a limited company it might be advantageous to take some of your income as dividends. Your salary could be just under the Income Tax threshold and dividend payments would make up the rest (dividends are generally taxed less than salaries).
Of course, if you are planning to look for tax efficient ways of paying yourself, make sure you consult a professional accountant first. You want to ensure that everything you are doing is completely sound from the legal aspect and works for your business.
When not to pay yourself
If your company is going through a tough time financially and you are struggling to pay out your employees’ wages, it’s probably best to avoid paying yourself too much. Doing so could really damage the business and your team’s view of you.
It’s also advisable to not get carried away with your salary if you owe a lot of money to someone. Your creditors won’t be happy if they see you taking money out of the business for personal use yet their invoices or loans remain unpaid..
Ultimately, you need to think carefully about the amount of money that you pay yourself. Your salary as a business owner should be reasonable and there are various things that you need to consider, such as the profitability of your business, the different business expenses and the tax implications on your salary.
On the other hand, it’s also important that you don’t undervalue yourself and pay what you deserve. At the end of the day, you are the person who puts the most time, effort and nerves into your business and you should be able to live a comfortable life. You should also consider talking to an accountant in this case, as they can help you find the best balance based on your individual situation.
Get professional advice
If you are still unsure how much you should pay yourself, we can help you decide. Our professional team of accountants is always ready to give you expert advice on anything business or finance related. Whether you are a startup or a large business, we tailor our advice specifically to your individual needs and wants.
We also provide a number of other accounting services, including day-to-day bookkeeping, VAT Returns and managing your payroll.
Get in touch with us by calling on 01202 755600 or dropping an email to firstname.lastname@example.org.