Your business is finally making a decent profit—one that is consistent and reliable. You’ve worked for a long time to reach this milestone, and as the owner of the business, you’ve paid a steep price for its financial and personal success.

It’s probably been ages since you took a week off, or much less, worked just an eight-hour day. Surely, the time has come when you can reap some of the rewards for all your hard work as you piggyback on the profitability you have laboured for so long to achieve.

You are now able to start paying yourself for your hard work. Here are some of the most powerful strategies for getting money out of your business—ways you probably haven’t thought

How you pay yourself depends on a number of factors, the main one being the type of structure you operate your business.

 

Paying yourself as a sole trader

As a sole trader (or as a partner in a partnership) the profits that you make from the business are yours to keep.

This means you don\’t pay a wage or salary and can simply record the money you draw from the business in your bookkeeping.

As a sole trader, you\’re taxed on the profit the business makes, and not on the amount of money you take out of the business.

 

Paying yourself through a company

Even if you’re the owner of your company, you\’re legally separate from the business. This means that you can\’t just keep the profits as income, in the way that sole traders do, so paying yourself from your company has a little more to it.

 

If you’re the director and the shareholder of your company and have no other sources of income during the tax year, then the most tax-efficient way to pay yourself is normally through a combination of a small salary each month, and then taking the remaining balance as a dividend.

 

Good tax planning aims to minimise the marginal tax rate of the directors/shareholders.

 

A small business operating via a company will pay a tax rate of 25%. Therefore, we would want to pay a salary to work directors that would not result in a marginal tax rate of 25%.

 

When you are paid a salary, you are treated as an employee, so the company will have to withhold tax installments each payday and super contributions (SGC) will apply.

 

This is a very complex area, and you should seek expert tax advice on how to best structure your payments from your company.

Paying yourself as a trust

Similar issues to that of paying yourself through a company structure, except a trust, does not pay tax and all profits are distributed each year to beneficiaries. Profits are not retained in a trust.

So, in this case, we usually advise a small salary to work directors and the balance is taken as drawings each month and we treat it as a loan from the trust.

We would then record the final balance owing to the trust, less any distribution of profits paid throughout the year – which would leave the net loan between yourself as an individual and the trust.

 

Frequently Asked Questions

What is the best way to take money out of your business?

There are effectively three ways to take money out of a business depending on the type of business structure you have:

• • Distribute profits

• • Pay wages; or

• • Provide a loan

There can be advantages and disadvantages to each.

 

Can I use my business money for personal expenses?

Paying personal expenses from the business bank account is not a good idea. They add to the number and complexity of the transactions you are paying us to deal with. Depending upon the legal structure through which you are trading, personal expense payments can create problems of Fringe Benefits Tax and deemed dividends.

 

Can a director withdraw money from the company account?

A director can take money out of the company in a number of ways:

• • salary, wages or directors’ fees

• • repayments of a loan you have previously made to the company

• • a fringe benefit, such as an employee using a company car

• • dividends (a formal distribution of the profits)

• • a loan from the company

There are varying tax implications for each of these methods and advice should be obtained from a tax accountant.

 

Let’s sum it up

Depending on the individual circumstances of you and your business, it is likely that a combination of these strategies will be most appropriate. For example, you may choose to draw a base salary to cover your ordinary living expenses, then consider whether to pay a dividend at the end of each financial year, depending on the business’s performance and your expected taxable income.

 

We highly recommend you discuss your options with us to make sure your strategy works for you.  We also consider all of the above scenarios when we are recommending your structure and doing tax planning for you. 

 

Still, have questions?  That’s OK, feel free to contact one of our amazing teams today!

 

Disclaimer: The information provided is general in nature and does not take into account your situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice