The share of earnings that a business owner pays for the right to be part of a certain business are

How to pay yourself as a sole trader or as a company

Your business structure affects how you take pay and how you’re taxed on that pay. If you’ve never done anything to set up a specific business structure, then you’re automatically considered a sole trader.

How to pay yourself as a sole trader or partnership

Sole traders and partnerships pay themselves simply by withdrawing cash from the business. Those personal withdrawals are counted as profit and are taxed at the end of the year. Set aside a percentage of your earnings in a separate bank account throughout the year so you have money to pay the tax bill when it’s due.

How to pay yourself as a company

Company owners often pay themselves a salary, which works the same way as with a normal job. The salary shows as an expense on the business books and the owner pays personal income tax on it. It’s common for owners of smaller companies to take a modest salary and top it up with dividends from profits.

While a salary might sound nice, there’s extra admin and extra costs to being a company. The numbers don’t always stack up, so definitely speak to an accountant or tax professional to decide what’s right for you.

How much to pay yourself

Once you’ve decided how to pay yourself as a business owner, you still need to decide what to pay yourself. That number needs to strike a balance between what your household requires and what your business needs.

You need to leave enough cash in the business to cover:

• Expenses: Keep a formal list of what you owe and when it’s due so you don’t draw too much from the business at the wrong time. Accountants say it doesn’t go well when business owners try to guesstimate their cash flow requirements. Keep some money aside for taxes too.
• Rainy day funds: Tuck away some cash to ride out business disruptions. You might keep enough aside to cover 30, 45 or 90 days worth of expenses, for example.
• Reinvestment: Hold onto some money for developments and improvements. Someday you’ll want to buy new work tools, try a new marketing idea, or hire a consultant.

Your household budget needs to cover day-to-day living expenses and debt repayments such as mortgages. Don’t forget to make a plan for insurance and retirement, which your employer may have managed before you went out on your own.

There will be negotiable items in both the home and business budgets. Be prepared for some give and take – especially during the early days of your business.

Typical business owner salary or pay

Most business owners take only modest weekly or monthly pay – just enough to meet household living expenses. The rest of the cash is left in the business where it acts as a float to cover against a lull in revenue or unexpected business expense. If cash reserves build up in the business, an owner might take out extra ‘bonus’ payments.

So while there aren’t any worthwhile stats on average business owner salary or income (each business is different after all), their regular pay tends to be conservatively low.

How to pay yourself fairly as a business owner

Irrespective of how much you pay yourself, be fair about it. Pay yourself a consistent amount at frequent intervals. That predictability will help you run a functional home budget.

This is where the rainy day fund for your business can help. Having a reserve of cash in the business reduces the need to dip into your own pocket when there’s an unexpected expense at the shop or office. And having that financial security in your personal life helps clear your head to be a better business manager.

An accountant or bookkeeper can help you figure out how to pay yourself as a business owner. They’ll help you work out an amount for now and a plan for the future.

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1Part 1

1. Introduction to small business tax 1
2. What is corporation tax? 2
3. What is VAT? 3
4. Business rates 4
5. Employers’ National Insurance contributions 5
6. Income tax and NI 6
7. Tax-deductible expenses 7

What taxes do small businesses pay?

Updated 30 August 2022

5min read

Introduction to small business tax

Your business may have to pay a number of different taxes, such as:

• corporation tax
• income tax
• VAT
• business rates
• Employers' National Insurance contributions
• capital gains tax

What tax your business pays will depend on how it’s set up, whether or not you have employees, and other factors such as your business assets and premises.

Primarily, your business will be taxed on its profits (the net amount of money it makes after losses and expenses). How this happens will depend on its structure. Sole traders pay income tax, as do partnerships (with partners submitting separate tax returns), and also Employees’ National Insurance contributions. Limited companies pay corporation tax.

You may also have to pay business rates on your premises.

If you supply VAT-able goods or services, and your taxable turnover is above a certain limit (currently £85,000) then you will need to register for VAT.

If you have employees, you will need to pay Employer’s National Insurance contributions.

Finally, when a sole trader or partnership sells assets that have increased in value, there may be capital gains tax to pay (limited companies pay corporation tax).

What is corporation tax?

If your business is a limited company it must pay corporation tax on its profits – both from trading and from the sale of investments or assets. Currently the rate is 19 per cent.

You’ll need to register for this tax when you set up as a limited company (within three months of starting to trade). You are responsible for ensuring that you pay the right amount of tax, so you must keep accurate company accounts and file a Company Tax Return by your deadline (an accountant can take care of this).

Find out more about corporation tax, when and how to pay it, and the reliefs and allowances available.

What is VAT?

VAT (value added tax) is added to most goods and services. If your business is above a certain size (a turnover of £85,000 excluding VAT-exempt sales) then you must be VAT-registered. However, you can register for VAT voluntarily if your business is smaller, as although it is a major responsibility, there can be some advantages in doing so.

When your business is registered for VAT, you must charge it on all VAT-able products and services. You will then submit a quarterly VAT return to HMRC, and at the end of each tax year you receive a tax bill for the total that you owe. This is called your ‘output tax’.

The good news is that you can also claim back VAT on products and services that you buy (this is your ‘input tax’). If your input tax is greater than your output tax, you can reclaim the difference from HMRC in your VAT return. This is one reason why some smaller businesses may choose to register voluntarily.

Find out more about VAT.

Business rates

Business rates are charged on most business premises. If you work at home and use only a small part of your home (e.g. one room) then you may not have to pay them, but if a large part of the property is for business use (e.g. a shop with living space above it) then you may be charged business rates.

The amount you have to pay is based on the value of your property, so can increase if commercial property prices rise in your area. You can estimate how much yours will be using HMRC’s calculator. However, if your bill increases it will do so gradually, thanks to transitional relief.

Small business rates relief

Other business rates reliefs are available, and these can enable you to reduce or even eliminate your bill. They are available to many kinds of business property, for example:

• Lower-value properties (£15,000 or under)
• Those used for charitable purposes
• Those in Enterprise Zones
• Some pubs
• Some agricultural buildings

Your accountant can help you work out your business rates bill and identify any reliefs for which you qualify. Find out more about business rates.

Employers’ National Insurance contributions

If you employ staff you will need to pay National Insurance Contributions (NICs) on their wages. These are known as ‘secondary Class 1 NICs’, and are not to be confused with ‘primary Class 1 NICs’ which are made by employees through PAYE.

You will also have to pay these contributions on most employee benefits (e.g. company cars, private medical insurance) and on expenses claimed by employees.

The amount is usually 15.05 per cent of the earnings or benefit, though there are exemptions for certain employees, such as those earning £242 or less per week.

Income tax and NI

If your business is a limited company (paying corporation tax on its profits), as a director you will still need to take an income, which could be subject to income tax and NI contributions. You have some flexibility about how you do this, and this can help you reduce the tax you need to pay.

The two main ways to take an income from a limited company are as

• Salary
• Dividends

Salary

Salary is subject to income tax and NI contributions above certain thresholds. However, because you as a direct set your own salary, you may be able to reduce the amount of tax you have to pay.

For example, if you pay yourself a salary below the Primary Threshold, you won’t have to pay NI or income tax. And so long as it’s above the Lower Earnings Limit, you will still qualify for the State Pension. Alternatively you could pay yourself a salary up to your Personal Allowance, which would be free of income tax but subject to employee NI contributions.

This would still result in a low income, but you may be able to top it up by taking dividends from company profits.

Dividends

Dividends can be a more tax-efficient way to take income from your company. A dividend is a portion of the company’s profits, paid to all shareholders for every share they hold (so if you own 60 per cent of the shares, you receive 60 per cent of the dividends, and so on).

The first £2,000 of dividend income you receive in any tax year is tax-free, and after that is subject to dividend tax. Like income tax this is banded (depending on your taxable income) but the tax rates are lower: 8.75 per cent for basic rate, 33.75 per cent for higher rate and 39.35 per cent for additional rate.

Bear in mind that because dividends are a share of profits, you cannot pay a dividend if your company does not make a profit. All dividend payments must be recorded and declared, even if you are the sole shareholder.

Your accountant can advise you more about ways to take income from your company, and recommend the best strategy for you.

About the author

Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.