How to Pay Yourself as a Business Owner | QuickBooks UK (2024)

How do business owners pay themselves? The answer isn’t as simple as it sounds.

Most new business owners are accustomed to having their salaries handled for them by payroll and accounts departments, including PAYE registration and pension contributions, but when the time comes to handling this responsibility by yourself there are a number of options which could benefit your overall salary, reduce your tax contributions, or improve your company’s profits.

In this blog from QuickBooks, we will cover everything you need to know about how to pay yourself as a business owner.

How should I pay myself as a business owner?

Business owners will use different methods to pay themselves depending on the structure of their business, their overall profits, or the status of their business as a limited company.

If you are self-employed or involved in a partnership, then your salary will be taken directly out of the business, as such, it is up to you to ensure the amount you are paid does not adversely affect the profits of your business and your ability to make payments, fulfil financial obligations, or otherwise keep your business financially afloat. If you are self-employed or involved in a partnership, you should also take into account that you may owe tax after completing a Self Assessment.

As the director of a limited company, you are classed as both the owner of the company and an employee. In this instance, you will draw a salary directly from your business, but you can also utilise dividend payments, which are taxed differently to regular salaries and may allow you to reduce your overall tax bill.

How to pay yourself as a sole trader or as a partnership

As a sole trader or partner within a business you draw a salary directly from your business, which are counted as business profits and taxed accordingly. If you pay yourself using this method then you should make sure to keep aside a percentage of the business profits based on your tax rate, this way, you will have enough saved at the end of each tax year to pay your Self Assessment tax bill.

For example, if you are on the basic rate tax band of 20%* and your business profits are £1,800 a month, then you should put aside £360 a month as tax.

*Tax band accurate for 2024/25

How to pay yourself from a limited company

If you are the owner of a limited company, then you should register as an employee of the company to receive a salary. In this instance, your contributions such as income tax and national insurance will be deducted via the PAYE system and paid directly to HMRC.

This type of payment should be handled by your payroll department in the same way as any other employee’s salary. You can use online payroll software to simplify this process for yourself and your payroll department.

Can I pay myself both a salary and a dividend?

Depending on the size and profitability of your company, you may wish to take home a modest salary each month and top this up by paying yourself dividends - a type of financial reward paid to shareholders based on the profits of a company.

Dividend payments are taxed differently to regular income, and you can also benefit from a personal dividend allowance depending on the relevant tax year.

How much dividends can I pay myself?

You can pay yourself as many dividends as you like, but you should be aware that a company that does not have any retained profits cannot make dividend payments.

Dividends are also subject to a yearly tax free allowance, which at the time of writing are £500 tax free for 6th of April 2024 to 5th of April 2025. For any amount over this, dividends are taxed at either a basic rate, higher rate, or additional rate depending on your income tax band.

These amounts for the tax year 2024/25 are:

What are the most common ways business owners pay themselves?

Using the above methods, you can decide how you wish to be paid from your business.

Pay yourself a salary as an employee

If you run a limited company, you must register the company as your employer. Through this method, you can be paid a regular salary in the same way as any other employee. This method can be beneficial for a number of reasons, for example, being paid by an employer means any financial obligations such as tax, National Insurance, and even pension payments will be automatically deducted before you receive a payment.

This can be a great way to remove any additional responsibilities such as paying your own pension, or filing a yearly self-assessment.

Paying yourself dividends

Dividend payments can be a great way to reduce your overall tax liability. If your desired salary is likely to push you into a higher tax bracket, you can utilise dividend payments to reduce your tax liability and take home more money each month. You can receive a larger overall salary by utilising this method because tax rates for dividends are generally lower than income tax rates.

For example, in the tax year 2024/25, income tax rates on the basic tax band are 20%, whereas dividends tax rates are 8.75% on earnings above £500 per year.

Taking the above rates into consideration, if your salary was £2,000 a month before tax you would be taxed 20% of this for a total of £400, reducing your take home pay to £1,600 (not including national insurance, personal allowances and pension contributions).

By accepting part of your salary as dividend payments, you could reduce your overall tax liability in the following example:

• You agree to take £1200 a month as your salary before tax.

• You top this up with £800 in dividend payments each month.

• Your £1200 monthly salary would be taxed at a rate of 20%, leaving you with £960 after tax.

• Your monthly dividend payment of £800 would have a portion tax free, with the remainder being taxed at a rate of 8.75%, leaving you with £734 in dividend payments.

• Your monthly total take home after tax would be £1694.

Without taking dividend payments, your take home pay from a £2,000 salary would be £1,600.

Dividend payments can also be used to avoid a higher tax bracket, where a promotion or raise might take your salary into the higher or additional rate tax bands. In this instance, you can take dividends payments over a payrise in order to avoid moving into the next tax bracket.

How much do business owners typically pay themselves?

There is no set amount a business owner should pay themself, with this figure being dependent on the profits of business, what your business can afford to pay a director, and how much money your business requires to run smoothly.

Considerations before taking payment from your business

You should take the following into consideration before deciding on an amount to pay yourself.

Firstly, consider the financial needs of your business such as:

• Leave your business enough money to cover any business expenses, such as employee salaries, debts or repayments, material costs, etc. Having an effective cash flow management system is essential to any business.

• Keep money aside for emergencies. As a general rule, your business should have enough money set aside to cover up to 90 days worth of expenses in the absence of any new money coming in.

• Keep money aside for investments, improvements, and development, such as hiring or buying new equipment, marketing and advertising costs, consultation costs, and any other business related expense that requires investment.

Once you have considered your business needs, you should also consider your personal and household needs. You should make sure your income fully covers your mortgage or rent expenses, your day-to-day living requirements, any pension payments you make outside of your salary, and any personal expenses relevant to your lifestyle.

How to pay your own tax

If you take payments directly out of your business, such as in a partnership, then you will be responsible for paying your own tax, as these obligations will not be automatically deducted at the point of pay.

When you take a salary in this manner, you will need to complete a Self-Assessment to inform HMRC of how much tax you owe each year. You should register for Self Assessment as soon as possible, and bear in mind which tax bracket you will be subject to based on your yearly salary, as you will need to pay a percentage of your monthly earnings at the end of each tax year.

You can read more about how to pay your HMRC Self Assessment tax in our blog.

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