Should you be on PAYE as a business owner?
Often, we set up a business hoping it will be successful enough to pay us back for all our hard work financially. This can’t come fast enough, but when it does, do you know the best way to pay yourself?
Well, you don’t have to pay yourself anything at all if you don’t want to. This is sometimes an option if your business is a side venture or isn’t very profitable yet. You might invest any money you make right back into the business to help move things along. But, if your business is your main source of income, it’s time to think about how you will pay yourself.
There are two main ways to do this – PAYE and dividends.
Paying yourself through PAYE means you’re classing yourself as an employee of the company and the director. The salary you get to choose for yourself is up to you, but it should fit with the financial position of your business. Also, unless you have a written contract with the company detailing your employment, minimum wage laws do not apply. You can pay yourself as little as you like as well.
The downside to this is that, depending on how much you earn, you could pay high amounts of income tax and national insurance contributions, making it a less tax-efficient way to pay yourself.
Dividends are paid to shareholders when the business makes a profit. Because you pay tax on the profit through corporation tax (20%), dividends are usually a more efficient way to pay yourself compared to PAYE. But, this is called into question when you consider the dividend allowance. If you’re earning over the £2,000 allowance, your dividend earnings will be added to your overall income and subject to dividend tax according to your earnings. The tax bands are:
Basic rate – 7.5%
Higher rate – 32.5%
Additional rate – 38.1%
It’s worth noting that dividends are only payable from after-tax profits. So, if you’re not turning a profit yet, you’ll have to pay yourself through PAYE. All shareholders must take the same level of dividend if they are of the same share class unless there is a written agreement for certain shareholders to waive their fees.
Choosing how you receive your money from your business can be complicated. But, with the right guidance, you can set up a tax-efficient, simple way to pay.
Why not get in touch with the accountants at Big Hand? We focus on giving professional business advice and managing your accounting needs with our expertise you don’t have to worry. All you need to do is call us on 0161 327 2911.