Setting your salary when you own a small business
Your small business exists to meet the needs of your customers, but you, the owner, also need to organise your own rewards. As the new financial year dawns, how do you go about setting your salary?
Pay the Tax Man first
The least forgiving of all creditors is HMRC, so it absolutely essential that you maintain sufficient funds to pay your tax-on-profits bill each January 31st and July 31st.
Rather than trying to anticipate profit calculations in advance, as your incoming payments are received, simply siphon 25% off into a separate bank account. This can then be used for the tax bill when calculated later, and makes managing the rest of your finances much easier.
Sole traders: it’s not a salary
If your SME functions as a sole trader, then the owner is not paid a ‘salary’ as such, instead they take ‘drawings’. Drawings are taken from the company profits after tax: they do not constitute a deduction against taxable profits.
You can vary your drawings depending on how well the business is doing: peak and trough seasons are common for small businesses. But you should always ensure that after paying yourself, there remains enough cash to cover your liabilities for at least a month or two.
Limited companies: further requirements
If your SME is a limited company, you need to formalise salary arrangements in order to meet directors’ requirements for PAYE and NIC. Take care to minimise your tax liabilities and ensure you set enough money aside for both working capital and tax bills.
Drawings, salaries and tax liabilities can be complex for businesses of all types and sizes, so if you need advice or assistance, contact an expert SME accountant for help.
