One of the trickiest parts of running your own business is figuring out how much to pay yourself. It’s not like being on a regular salary where you know what’s coming in each month. Instead, you’ve got to balance keeping the business running smoothly with making sure you’re rewarded for your hard work.
Paying yourself properly isn’t just about taking money out of the business when you need it—it’s about planning, consistency, and keeping your business finances in good health. Here’s how to find the right approach and make sure you get a fair wage.
Why It’s Important to Pay Yourself Right
When you’re a business owner, it’s easy to put yourself last. Many people end up reinvesting everything back into their business and only take what’s left over—if anything at all. But this can lead to burnout and personal financial stress.
Paying yourself a fair and consistent wage:
- Helps You Budget Personally: Knowing what you’ll earn makes managing your own bills and expenses easier.
- Creates a Clear Boundary: It stops you from dipping into business funds without thinking and keeps accounts organised.
- Builds a Sustainable Business: Paying yourself properly shows your business is healthy and that it supports your lifestyle, not the other way around.
Ways to Decide What to Pay Yourself
There’s no one-size-fits-all answer, but here are a few methods to help you find the right balance:
💰 1. Set a Fixed Salary
One straightforward approach is to pay yourself a set amount each month. This works well if your business has steady income and predictable expenses.
How to Do It:
- Work out your business’s average monthly income.
- Subtract regular business expenses, including tax and savings.
- What’s left over can be your salary—make sure it’s a sustainable amount that leaves enough to keep the business running.
Pros:
- Predictable income for your personal finances.
- Helps with budgeting and managing your household bills.
Cons:
- Harder to manage if your business income is inconsistent.
📈 2. Pay Yourself a Percentage of Profits
If your income varies month to month, you could take a percentage of your profits as your wage. This keeps things flexible and ensures you’re not taking more than the business can handle.
Example:
- If you decide to take 30% of profits, and your business makes £5,000 one month, you’d pay yourself £1,500.
- If the next month is quieter, and you only make £3,000, you’d take £900.
Pros:
- Helps balance your personal income with the ups and downs of your business.
- Avoids putting your business under financial strain.
Cons:
- Less predictable for personal budgeting.
🧮 3. Pay Yourself Based on Cash Flow
If your business has seasonal highs and lows, you might want to adjust your pay based on cash flow. This involves setting a minimum ‘base’ salary and topping it up when business is booming.
How It Works:
- Set a minimum amount you need to cover personal bills and expenses.
- During busy periods, increase your salary if cash flow allows.
- During quieter months, stick to the base salary to keep the business in a safe position.
Pros:
- You get a consistent base income with the potential for more when times are good.
- Helps keep your business’s cash flow healthy.
Cons:
- Requires careful cash flow management to avoid taking too much too soon.
How Much Should You Pay Yourself?
The exact amount you pay yourself will depend on your business’s performance and your personal needs. Here are a few things to consider:
📊 1. Know Your Business Costs
Make sure you cover all your business expenses before setting your wage. This includes supplies, tools, bills, and tax.
💷 2. Consider Your Personal Budget
Work out what you need to cover your personal expenses, including rent/mortgage, bills, and living costs.
🔍 3. Leave Room for Savings
It’s good to keep some money in the business as a buffer. This can help with unexpected costs or quieter periods.
A Good Starting Point:
- If your business is new, it might be wise to start small and increase your pay as the business grows.
- If your business is established, aim for a wage that reflects your role and the value you bring to the business.
What About Taxes?
When deciding what to pay yourself, it’s important to think about how it affects your tax bill:
📝 Sole Traders:
- You’ll pay income tax and National Insurance on your earnings.
- It’s worth setting aside money each month for your self-assessment tax bill.
🏢 Limited Companies:
- You could take a salary and dividends, which might reduce your tax bill.
- There are more rules and paperwork involved, so it’s worth getting advice from an accountant.
Mistakes to Avoid When Paying Yourself
💡 Don’t Take Too Much, Too Soon: You need enough left in the business to cover expenses and growth.
💡 Avoid Random Withdrawals: Regular, planned payments are much better for your accounts than dipping into the business account as and when.
💡 Don’t Ignore Taxes: Make sure you set enough aside to cover your tax bill—no one wants a surprise from HMRC!
How Buzz Accounting Can Help
If you’re struggling to decide what to pay yourself or need help managing your business accounts, we’re here to help. At Buzz Accounting, we make it easy to keep track of income, expenses, and taxes—so you can take a fair wage without worrying about your business’s finances.
Whether you need a bit of advice or full accounting support, we’ve got your back. Drop us a message or get in touch today—we’d love to chat about how we can help make managing your business finances a doddle.