One of the first questions small business owners ask once money starts coming in is how much they should be paying themselves. If you are at the stage when you can afford to pay yourself a salary as a business owner, our small business owner salary guide will help you navigate this tricky question.
How much should small business owners pay themselves? Small business owners can pay themselves as much as 77% of trading profits up to £50,000 as sole traders. Small business owners who are limited company directors or shareholders could pay themselves as much as 85% through a combination of salary and dividends.
However, as with any business decision, the percentage you pay yourself is not always that simple. There are many things to consider, all of which we’ve outlined for you below in our small business salary guide.
Here’s a guide to what percentage a small business owner should pay themselves depending on how the business is structured – there are examples for sole traders and limited companies.
How much do small business owners pay themselves?
You took the brave decision to start a business and are now at the point where you want to be financially rewarded for your efforts. You can your pay yourself a salary as a business owner but deciding how much to pay yourself as a small business owner isn’t as straight-forward as the generic answer we’ve already given you.
The truth is, the amount you can pay yourself as a small business owner will vary depending on the profits you have earned, tax you may have to pay and possible investment in plant and machinery you may need to carry out your business.
Even the tax vehicle you have chosen, whether it be a sole trader or limited company, also impacts your decision on your small business owner salary.
You might also want to consider the relevant cash flow that will affect when you can afford to pay yourself and how to maximise your pay as a small business owner.
It is important to get familiar with this now to avoid making costly mistakes.
How to pay yourself as a sole proprietor
As a sole proprietor, you are not an employee of the business. You may run a payroll and have employees but you as the business owner do not pay yourself through the payroll a wage or salary.
Any payment you make to yourself is called a ‘drawing’. You can pay yourself a drawing whenever you see fit. Drawings are not included when calculating your profits. They are not tax-deductible so remember to ignore them when calculating your profit for tax purposes and what is available to pay yourself.
How much should a small business pay themselves as a sole trader?
How much a sole trader pays themself depends on the profit made by the small business less any tax owed to HMRC. This means you need to have a system for recording your income and expenditure to calculate your profit.
Handy Hint: Did you know that 7% of HMRC investigations are at random. Here’s what you need to do to reduce your chances of an audit.
There are many finance packages available to help you with this.
We would recommend calculating your profit regularly so you can adjust the amount you are taking from the business. Taking too much as a small business owner salary may leave you with cash flow problems and put the business in trouble.
As a sole trader, you pay tax on the profits of the business and not the drawings you have taken from the business.
Example
| Income | 45,000 |
| Costs | (10,000) |
| Trading profit | 35,000 |
| Tax | (5,000) |
| Net profit | 30,000 |
| Drawings | 20,000 |
| Available | 10,000 |
Payments on account of income tax for self-employed
When paying tax as a sole trader you pay in arrears based on the previous periods’ profit. You do not know the amount until you have completed your first trading period. The amount of tax is then paid to HMRC when completing your self-assessment tax return.
You will also have to make payments on account towards the following year in two instalments on 31st January and 31st July. This means that if you owe £5,000 tax for the first year you will also have to pay an additional £2,500 on each of those dates towards the following year’s tax.
In this example, you would pay £7,500 on 31st January and £2,500 on 31st July. This is important to consider when deciding how much you should pay yourself as a sole proprietor.
Handy Hint: Remember if you are more successful in the subsequent year your payments on account may not be enough to pay your tax bill and there will be even more money to pay. This often catches people out.
Below is a simple table showing you different scenarios based on tax rates for 2022/23.
| Trading Profit | £25,000 | £50,000 | £75,000 | £100,000 |
| Tax | £2,486 | £7,486 | £17,432 | £27,432 |
| NI | £2,726 | £5,289 | £8,655 | £12,030 |
| Pay | £19,788 | £37,228 | £48,913 | £60,538 |
| Take home as a % | 79% | 75% | 65% | 61% |
How to pay yourself as a limited company?
How much business owners pay themselves when set up as a limited company is different to paying yourself a salary as a sole trader. This is because a limited company is a separate legal entity. You are separate from the limited company in a legal sense.
You may be a director, shareholder, or employee and this is not uncommon in a small, limited company. Each one of these roles performs different duties.
As an employee of the limited company, you can pay yourself a salary and be paid weekly, monthly, or annually in line with your payroll period into your personal bank account.
As a shareholder in a limited company, you can pay yourself dividends. Dividends can be paid by the business if it is profitable and has the cash to make the payments. The directors of the business will suggest the level of dividends to be paid which is then agreed upon by the shareholders.
In a small, limited company that maybe you.
You can decide how frequently you wish to pay dividends, but you need to ensure you adhere to the correct rules such as holding a directors’ meeting to declare the dividends, keeping minutes of the meeting, and producing the relevant dividend vouchers.
Handy Hint: Before you pay yourself a dividend, make sure you read our guide to unlawful dividends.
For most small business owners, the tax you pay may be your biggest expenditure. Knowing how much that is going to be and the timing of the payments is vital.
Handy Hint: Keeping proper records and receipts is essential if you want to claim business expenses.
How much should a small business pay themselves as a limited company?
How much a small business owner pays themselves as a limited company depends on the profit made by the business less any tax owed to HMRC. This means you must have a system for recording your income and expenditure to calculate your profit. There are many finance packages available to help you with this.
We would recommend calculating your profit regularly so you can adjust the amount you are paying yourself from the business. Taking too much may leave you with cash flow problems and put the business in trouble. If you take more money than the business can afford it may create an overdrawn director’s loan account. There are several tax and practical consequences of being in this situation.
Below is a simple table showing you different scenarios for a limited company based on tax rates for 2022/23. Corporation tax rates will increase to 25% from 1st April 2023. A small profit rate of 19% for companies not exceeding £50,000 will take effect from the same date.
In each example, we have assumed a salary has been paid to the small business owner of £12,500 per annum. The trading profit appears lower than in the sole trader example because the salary has already been deducted when calculating the trading profit.
| Trading Profit | £12,500 | £37,500 | £62,500 | £87,500 |
| Corporation Tax | £2,375 | £7,125 | £11,875 | £16,625 |
| Net Profit | £10,125 | £30,375 | £50,625 | £70,875 |
| Salary | £12,500 | £12,500 | £12,500 | £12,500 |
| Dividends | £10,125 | £30,375 | £50,625 | £70,875 |
| Tax | £711 | £2,483 | ||
| Take home as a % |
Please Note: You may have been paid a wage or salary from the business which is included in the trading profit of the limited company. This affects how much tax the company pays and how much profit might be available to pay as a dividend. There are different levels of income whereby it may be more beneficial to operate as a sole trader / limited company, especially with the changes to the corporation tax rate. This is a complex area and worth seeking professional advice.
Frequently asked questions about small business owner salaries
Can you pay yourself a salary as a business owner?
Yes, you can pay yourself a salary as a business owner. If your business is a limited company, then you can be an employee of the business and be paid a salary through the payroll. The amount of salary should be discussed with an accountant to ensure it is tax efficient.
What percentage should you pay yourself as a small business owner?
The percentage you pay yourself as a small business owner will depend on your personal and business situation. As a rule of thumb if trading as a sole trader you can pay yourself a percentage of approximately 77% of your trading profit below £50,000.
If you are operating as a limited company, you can pay yourself approximately 85% of the trading profit before corporation tax.
There are many considerations to consider so make sure you seek professional advice if you are not certain.
How do I pay myself a wage from my small business?
If your small business is trading as a sole trader, you will pay yourself drawings which can be paid as you see fit.
If you are operating a limited company then you would be paid net of tax and national insurance at intervals, usually monthly, via the payroll.
Dividends may also be paid if profits allow.
Handy Hint: Read our guide to buying a car through a business before you consider looking at vehicles.
Conclusion
What seems like a straightforward question does not always provide a simple answer. How much you can pay yourself as a small business owner and how you go about paying yourself involves multiple variables. Those variables can change as your personal and business circumstances evolve.
It is crucial to be aware of this and adapt what you pay and how you pay to suit your circumstances. This is a complex area of running a business and one that most will only think about after the fact when it is too late, and mistakes have been made.
Hopefully using the guidance in this article will give you a solid base to apply to your individual situation. We would advocate speaking to a professional in relation to this.
We are confident any fees spent will outweigh the pain and potential risks associated with getting this wrong.
You might also like…
- How to put your personal money into a limited company
- Can you borrow money from your limited company
- Does a company have to pay 45p per mile for employees
Jon has been in business since 1999, and in that time worked with more than 300 small business clients. As well as being an accountant, he is also an early adopter of tech, and has helped small businesses to leverage the power of their computer systems by creating software to automate and simplify accounting tasks.
