How Much to Pay Yourself:

• Profits not revenue – you should only pay yourself out of your profits — not revenue. That is to say, make sure you have covered all the costs your business needs to keep running (and perhaps keep a little in reserve) before you take money out of the company for yourself.
• Pay yourself what you’re worth – pay yourself a “reasonable” sum. But what exactly is a “reasonable sum”? There are no hard and fast rules, but you might want to think about:
  • What is the prevailing market rate for people in a similar role to yours? Take a look at newspapers and job ads — which can help you get a feel for the “market rates.”
  • How does your pay compare to your employees’ pay?
• Remuneration and incentives – you could tie your pay to your company’s performance (e.g., stock vesting over a period of time, pay tied to meeting certain performance targets). While this approach is often applied to employees, there is no reason why this couldn’t apply to you as well.

Tax Considerations:

When paying yourself out of the profits of your company one of the key considerations is how this pay will be taxed. It is worth creating a tax efficient pay structure. The precise structure you should use depends on the particular circumstances of your business and can be complex. It is worth getting specific advice from tax advisors before you come up with a final plan, but here are some potential options to get you started:

• Salary – taking a basic salary is the most straightforward and transparent way to pay yourself. You can and should pay yourself a basic income from your company— this will ensure you receive a regular income— but it may not be the most tax efficient way to get paid. For the 2020/2021 tax year, income is taxable at 20% for basic income up to £50,000 and 40% for income above that.
• Dividends – if you hold stock as the founder of a company you could pay yourself a dividend on the shares that you hold. This may be a more tax efficient way to pay yourself, and can be used together with a salary.
• Stock and options – taking stock or options instead of a salary is another way to pay yourself. This can also be a tax efficient way to take pay, and can align your interests with that of the company.
• Pension / Benefits – paying part of your salary directly into a pension scheme can be one of the most tax efficient ways to pay yourself— in the 2020/2021 tax year, tax relief was granted on pension contributions up to 100% of your salary. You could also provide certain benefits to yourself and your employees (e.g., medical, gym subsidies, childcare, etc.), however, these will be taxable at normal income tax rates.

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