We get asked this question all the time. If you’re a sole trader, it’s dead easy: you are the business.
It’s just about working out what a reasonable take-home might be. For limited companies, though, it’s more complicated. You’ve got to pay yourself some salary and cover National Insurance.
But you probably want to take the rest as dividends or – I know, it’s boring, sorry – pension contributions. Otherwise, you’ll be paying a stupid amount of tax for no reason.
So how do I pay myself as a tradesman?
Depending on how you have your business set up, there are several ways you can choose to pay yourself. Now in our opinion, each has its own pros and cons, but you need to understand each to weigh up your options.
Sole trader
Simply withdraw cash from the business. Easy.
These withdrawals are classed as profit and taxed at the end of the year, so make sure to set aside a percentage of your earnings in a separate bank account, so that you can pay the tax bill when it’s time at the end of the year.
Limited company
When you run your own business, it’s different from acting as a sole trader.
You may already know this, but it’s worth repeating – you’re a separate entity, and therefore have less connection to the business. If something were to go wrong – say a fire in the yard – you wouldn’t be personally liable for it.
This means when paying yourself, you’d do so through a salary, much like a more regular job. Your salary will show up as an expense, with the owner paying personal income tax and national insurance on it.
Smaller company owners will often take a very modest salary, and top it up with dividends should they get more profits later on in the year.
So how much should I pay myself?
Temptation is a terrible thing. Especially if your business is doing well. You see the money coming in, and you know that you’re working really hard – that money is yours, right?
In our opinion, you want to be cautious and careful. How much do you actually need?
It’s worth keeping money in the business because it will leave you with a safety net should something happen.
What does the business need money for?
There are some obvious things you need to leave money in the business for:
Expenses
Make sure you keep a list of what you owe and when it’s due, so you don’t take too much from the business at the wrong time.
We all love some guesswork every now and then, but it won’t do you any favours if you do it wrong.
Rainy day funds
Put money away to save you from getting caught out by business issues.
For example, setting aside expenses cover by days is a good way to go about this. So, what does 30, 60 or 90 days of expenses look like for you?
Reinvestment
Save money for new equipment, tools, and developments. You want to grow and improve your operations, and you’ll struggle to do this without money.
Paying yourself fairly
It may be that you’re already doing this, but you need to make sure you pay yourself a fair amount, both for your business and for your own personal life.
Take too much, and you risk alienating yourself from your team or worse, crippling the business financially.
All it takes is a bit of understanding and perception of your business. Don’t waste money, spend it wisely and always plan ahead.
And if you’re worried about tax, you can always talk to us about making sure you get paid without paying too much to the taxman.