Paying yourself is one of the most exciting aspects of starting your own business, but it can also be a little daunting.
From the different types of payments to deciding how much your income should be, there are numerous questions to ask yourself before withdrawing money from your small business.
In this guide, we’ll take a look at the different ways to pay yourself, so you can feel confident when withdrawing money from your business. From revenue fluctuations to building an emergency fund, understand the considerations you need and understand more about how to pay yourself as a business owner.
How to pay yourself as a business owner: an overview
Paying yourself is one of the most rewarding milestones when starting a business.
It’s crucial, though, that before withdrawing a salary, you’re confident that your small business finances are stable. It’s equally important to avoid overpaying yourself, as this can negatively impact your business cash flow.
To make the task of how to pay yourself as a business owner simpler, there are key considerations that we’ll cover in this guide, including:
Your business cash flow and financial requirements.
Payment styles according to the structure of your business.
Balancing payments with tax obligations.
How much you should pay yourself as a business owner.
How to increase your salary over time.
By following these steps, you can generate personal income while also maintaining your business operations.
Disclaimer: This content is intended for informational purposes only and does not constitute financial advice or recommendation. You should always obtain independent, appropriate and tailored advice before making any legal, tax, investment, financial or other decisions.
How to pay yourself depending on your business structure
When registering your business, you’ll have chosen a business structure of:
A sole trader.
A limited company.
A partnership.
Your structure will influence how you can withdraw money from your business. Each type has its own set of rules regarding withdrawals and associated tax obligations, so it's important to understand the differences before making a decision.
To help you navigate this process, we've outlined some of the most common business owner salary options for each type of business structure.
How to pay yourself as a sole trader
As a sole trader, you and your business are considered a single financial entity. Any profits that your business generates are automatically yours.
This means that you have instant access to the revenue generated by your business, and can withdraw money when you need to through a process known as drawing.
Any money paid to yourself should be recorded on your Self Assessment tax return for income tax and National Insurance (NI) calculations and payments.
Advantages of business drawings | Disadvantages of business drawings |
|---|---|
You can withdraw whenever you want to with regular or irregular payments. | You’ll need to set aside savings to pay income tax and national insurance contributions (NICs). |
You can adjust your drawings depending on your personal financial needs. | If you can’t pay your tax bill, you’ll be personally liable for your debt. |
You can withdraw different amounts depending on business performance. |
As an example of business drawings in action, let’s say you start a business from home making vegan brownies for local cafes.
When a client pays an invoice, you set aside a percentage to pay the basic rate for income tax. You can then draw money to pay yourself, ensuring you have enough funds left in your business account to cover expenses.
At the end of the tax year, you’ll report any payments made to yourself and can use the money set aside initially to pay your tax bill.
Follow government guidance on income tax rates and personal allowances for more information.
How to pay yourself as a limited company owner
As a limited company owner, you and your business are separate entities. Even if you’re the only individual working at the business, you’re considered an employee.
When it comes to how to pay yourself as a business owner of a limited company, a common method is to take a regular salary.
The UK government regulations are strict on how limited company owners can take a salary. Make sure you’ve registered your business as an employer before taking salary payments, and ensure that income tax, National Insurance Contributions (NICs), pension payments, student loan repayments etc. are deducted correctly.
Advantages of taking a salary | Disadvantages of taking a salary |
|---|---|
You’ll have a regular, predictable income. | There’s less flexibility to adjust your salary based on business performance. |
Taxes are usually deducted automatically when you’re paid, so you don’t have to set aside money for your tax bill. | Salaries are considered a business expense that reduces net profit (the amount of profit you generate after costs). This can affect growth plans, such as taking out a loan for business expansions. |
You may be eligible for government benefits, as well as sick pay and maternity or paternity pay. | |
Your salary is tax deductible and can therefore reduce your corporation tax nill. |
Another option for owners of limited companies is payment through dividends.
Dividends are a distribution of business profit paid to shareholders. They’re often distributed quarterly, though you can adjust payouts to suit your business and personal finances. Dividends are paid after business expenses are accounted for.
While your business won’t pay tax on dividends, you’ll still be required to pay personal income tax. Follow government guidance on the current dividend allowance and tax rates to ensure compliance.
Advantages of dividends | Disadvantages of dividends |
|---|---|
As long as you have the available business profits, you can choose how frequently you pay dividends. | Dividends can only be paid when your business has generated a profit after corporation tax. |
Dividends aren’t subject to NI payments and can have a lower income tax rate than salaries that are above the personal allowance threshold, depending on your personal circumstances. | They’re not tax deductible. |
A dividend that is higher than your business profits will be classed as a Director’s Loan and must be repaid. An unpaid loan can affect your credit score. |
When deciding between a business owner salary vs dividends, consider your business and personal finance goals alongside tax considerations.
For example, a salary creates a reliable income which can make it easier to manage your personal finances and plan for the future.
The tax benefits of dividends could be beneficial for your business but may offer less consistency for your personal income as they depend on your business's profits.
How to pay yourself as a partnership owner
Businesses with multiple owners can choose to register as a partnership (you can also register a limited company with multiple owners).
In this case, you’ll create an agreement that details how you’ll share business profits. This might be an equal distribution or based on the input of each owner.
An example of this could be, you and a friend open a Japanese restaurant. One of you works part-time while maintaining another job, and the other works full-time.
In your partnership agreement, you detail that the individual working full-time will receive double the share of the business profits.
In terms of how you’ll pay yourself in a partnership, you’ll withdraw money following the same guidelines as sole traders. This will be recorded on your individual Self-Assessment tax return.
You’ll pay income tax and NI on the money withdrawn from your partnership.
Take a look at the government’s Partnership Tax Return Guide Notes for more information.
What is the most tax-efficient way to pay yourself?
All UK business owners will pay tax on draws, salaries and dividends. To choose the most tax-efficient payment method, let’s take a closer look at the following options including:
Balancing salary with dividends.
Tax-efficient pension contributions.
Salary vs dividends vs draw payments.
Balancing salary with dividends
If you own a limited company, the most tax-efficient payment method is often to take both a salary and dividends.
By keeping your salary lower than the current income tax personal allowance, you can avoid paying income tax on that portion of your earnings, provided this is your only income source.
However, it's important to note that the NI threshold is lower than the personal allowance threshold, so you may still have to pay NI.
Alongside your salary, you can also issue yourself a dividend. With a lower personal tax paid on dividends compared to salaries, this could be the most tax-efficient way of taking money out of your business
Tax-efficient pension contributions
A long-term strategy to reduce the tax you pay on your income is to increase your pension contributions.
As pension payments aren’t considered income, they’re tax-free. They’re also a business expense, allowing you to deduct them from your corporation tax bill.
By making employer pension contributions, you’re not limited by your salary. This means that you can pay more into your pension than you receive in income. Tax-free payment contributions are, however, limited by the annual allowance set by the government.
The downside to pension contributions is that you won’t be able to access the money until you reach the personal pension age threshold.
Salary vs dividends vs draw payments
To learn more about business owner draw vs salary vs dividend payments in terms of tax, we’ve put together a comparison chart.
Salary tax | Draw tax | Dividend tax |
|---|---|---|
Subject to income tax and NI, which is taken when you’re paid. | Subject to income tax and NI. | Subject to dividend tax rates which are generally lower than income tax rates. |
The government’s Pay As You Earn (PAYE) system deducts tax from each salary payment. | Only available to sole traders. | Your tax is either automatically deducted from your dividends or reported on your annual Self Assessment. |
Deductible as a business expense. | Must be reported on your Self-Assessment tax return and paid after submission. | Not deductible as a business expense. |
Not deductible as a business expense. |
5 considerations when paying yourself as a business owner
There are a number of factors involved when calculating how much you can pay yourself as a business owner.
To find the balance between business success and personal financial stability, we’ve reviewed some of the most important considerations for UK merchants.
How much does the average business owner in the UK pay themselves?
Determining a business owner average salary in the UK can be challenging, as it depends on the size of the business, industry, and geographical location.
Small business owners often reinvest profits back into the business and take a more modest salary, sometimes even below the national average. However, owners of established, more profitable businesses might draw a significantly higher salary.
Typically small business owners pay themselves between £25,000 and £50,000 annually. However, this can range widely depending on the success and financial health of their business.
Although there isn’t a clear figure on the average business owner salary in the UK. There is, however, information on average profits for small and medium-sized enterprises (SMEs). Using this information, we can see that the size of your business can often affect your potential income:
Number of employees | Average profit |
|---|---|
0 | £10,000 |
1-9 | £29,000 |
10-49 | £119,000 |
For example, if you start a business selling homemade tea at a local market and you don’t have employees, you might be limiting yourself to a lower salary. This could be a result of only having one route to market and limited resources to scale beyond £10,000 profit per year - impacting how much you’re able to pay yourself.
By expanding your tea business - by hiring employees to sell at multiple markets or setting up an online store - you’re more likely to increase your revenue and profit.
A business owner’s yearly salary could increase to an average of £29,000, though this doesn’t account for reinvestments of profits or business savings.
Understanding your business’s running costs
Understanding your small business expenses is crucial when deciding what to pay yourself as a business owner.
Your business needs enough working capital (the amount of cash needed to fund day-to-day operations) to meet financial obligations. This means calculating your fixed and variable costs.
Fixed costs
Your fixed costs remain consistent regardless of your sales. They can include:
Rent and utility bills.
Payroll expenses.
Fixed-rate loan repayments.
For example, if you run a dance school, your fixed costs might include the rent of the studio, your travel costs to and from the studio, and the wages of your team.
Variable costs
Unlike fixed costs, variable expenses can fluctuate as your business performance changes. These costs can include:
Materials.
Sales commissions.
Card transaction fees.
Following the example of a dance school, variable costs could include snacks for students, equipment provided, and transaction fees from purchases in your studio shop.
Create a small business budget
Creating a budget that assesses your current cash flow alongside a cash flow forecast builds a clear picture of your income and expenses. You can use your budget to calculate your net profit. This is the sum of money you’ll use to:
Pay yourself.
Reinvest in business growth opportunities.
Set aside in an emergency fund.
To learn more, we recommend taking a look at our guide to creating a small business budget.
Keep your personal and business finances separate
Separate your personal and business finances for a clearer understanding of how much you can pay yourself.
By opening a business account, you can track your expenses and easily monitor how much revenue can be reinvested into your business to cover costs. Account statements provide a complete overview of your cash flow, too, for a comprehensive look at your financial history.
With a better understanding of your business income and expenses, you’ll find it simpler to calculate how much you can afford to pay yourself.
Create a reserve fund
Your small business should have a reserve fund to cover unplanned expenses or drops in revenue. For example, you might need additional funds if:
Supplier prices increase due to inflation.
A piece of equipment essential to your business needs replacing.
You’re unable to run your business operations due to illness.
It’s a good idea to set aside a percentage of your revenue every month to create an emergency fund. Around 10% of your profit is a great starting point.
Long-term financial planning
When considering the average business owner's salary, it's important to factor in pension contributions.
We discussed earlier how these can help reduce tax on your income, but they’re also a staple in long-term personal financial planning.
The number of years you pay NICs will affect your eligibility for the UK state pension as well as how much you receive. You can use the government’s State Pension forecast to learn more about your predicted pension.
To receive a state pension at all, you must have made at least 10 years of NICs.
You can also factor in additional pension payments such as to a personal pension when carrying out small business accounting for long-term financial planning.
When can you increase your salary as a business owner?
When it comes to how much to pay yourself as a business owner, there are circumstances in which you can increase your salary. These include:
An increase in business profit
If your net profit increases due to a boost in sales, reduction in costs, or business expansion.
Better financial resiliency
You create a large reserve fund to cover around 3-6 months of business expenses, allowing you to increase your salary without great risk.
Financial milestones
You reach a financial goal, such as paying off a small business loan or achieving sales targets.
An improvement in your cash flow statement highlighting increased revenue doesn’t always warrant a salary increase. Ensure you record a steady and consistent rise in profit before paying yourself a more substantial salary.
How to increase your salary as a business owner?
Start-ups often benefit from reinvesting profit into growth strategies such as marketing and social media. This means that many new merchants pay themselves less to enable business growth and brand exposure.
As your business transitions from a start-up to a more established entity, though, there are payment strategies you can use to increase your personal income including:
Transitioning from draws to a salary.
Increasing business profit.
Using performance-based bonuses.
Transitioning from draws to a salary
Drawing money from a business is common for start-ups, creating flexibility during periods of lower revenue. As your profit increases, however, it might be more efficient to switch to a salary.
This would make your income tax deductible, creating a higher net profit from your total revenue. The higher your net profit, the larger potential salary you can withdraw.
This would also ensure a consistent income every month which can help with personal budgeting.
Increasing business profit
If you’re looking to increase your income, you also need to increase business profit. There are a number of ways in which you can do this.
Reducing overhead costs
Identify areas of financial waste within your small business, such as a subscription to services you no longer use. It’s also worth seeking new quotes for existing services to to ensure you’re getting the best value and highlight where you can reduce your spending.
You might also benefit from working with a small business bookkeeper who can help you identify unnecessary expenses and improve your cash flow.
Diversify your revenue stream
Are there ways you could bring additional income into your business? For example, if you’re a taxi driver you might expand your services to offer wedding, airport or corporate transportation, too, reaching a new audience and increasing your business profit.
Upselling and cross-selling
Encourage your existing customers to buy more using upselling (suggesting a more expensive version of the same product) and cross-selling (suggesting complimentary items).
Using performance-based bonuses
An annual bonus takes into account the performance of your business over the entire year. After a break-even analysis of that period, you can assess whether there’s enough profit to increase your yearly salary with a one-off payment.
This maintains stability within your business cash flow throughout the year, while still allowing you to increase your yearly salary.
Disclaimer: The contents of this page are intended for informational purposes only and should not be construed as professional advice. For matters requiring legal or financial expertise, it’s recommended to seek guidance from qualified professionals.
How to pay yourself as a business owner FAQs
Do business owners pay themselves a salary?
How do I pay dividends to myself?
How much should I pay myself as a business owner?
What’s the difference between a draw and a salary?
Do business owners in the UK pay income tax?
