Being a workaholic has become something of a status symbol in recent years.
Social media is full of stories of entrepreneurs who get by on 4 hours of sleep, never take a holiday and build a million dollar empire.
The general gist is that the only path to success is to fill every hour with work.
But behind the glossy images online there are tales of burnout and missing out on the good times.
Arianna Huffington, the founder of the Huffington Post, was once a workaholic.
But after collapsing from burnout and exhaustion in 2007, Huffington started taking her wellbeing more seriously.
The pursuit of an improved work-life balance has taken her life on a very different course and today she runs Thrive Global, a business dedicated to ending the stress and burnout epidemic.
While sites like Thrive Global offer practical advice on switching off from work, how to fund your lifestyle is rarely mentioned.
So how much should you pay yourself and what’s the best way to do it?
How much money do you need?
Start by thinking about how much money you need each month. What comfortable looks like will vary from person to person, but you should start by considering:
- day-to-day expenses
- big-ticket items, such as holidays
- saving for the future
- saving for others, such as a university fund for your children.
Other sources of income, such as rent from a second home or your partner’s salary, may reduce the amount you need each month.
What’s your value?
Many business owners prioritise the financial health their business and employees above themselves.
A fifth of small business owners can’t afford to take a day off work over the summer, according to research by Simply Business.
While this is very noble, it is not sustainable. Working hard but only paying yourself a nominal amount can suck the fun out of work and pile on extra stress.
Carry out a benchmarking exercise (The Drum publishes a creative, marketing and digital salary survey each year) to work out what your salary should be.
How much can you afford?
You’ll need to balance your income with the needs of your business. Maintaining a healthy cashflow and making sure you have cash reserves to fund growth should be priorities.
Accounting software, such as Xero, lets you see your profit in real time. This information is really useful when working out how much you can afford to pay yourself.
How to take money out of your business
Once you know how much you need and how much you can afford to take, you will need to decide how to take it from your business.
You have 3 main options if you run a limited company.
Salary
Drawing a salary in the same way as an employee gives you a regular income which you can continue paying even if your business isn’t making a profit.
A salary of just £8,164 a year will build your entitlement to the state pension.
You’ll pay income tax on earnings above your personal allowance (for most people it’s £11,500 until 5 April 2018).
Although not strictly a tax, you’ll also need to consider employer and employee national insurance contributions (NICs) which start at 12% for employers and 13.8% for employees on weekly earnings above £157.
The employment allowance reduces the employer’s national insurance bill by up to £3,000 a year. However, businesses where the director is the only employee can’t claim the allowance.
Dividends
Dividends are paid out of profits. Unlike a salary you get the flexibility to take regular payments or lump sums.
The first £5,000 of dividends each year are tax-free. After that, tax is based on your income tax band:
| Tax band | Rate |
| Basic | 7.5% |
| Higher | 32.5% |
| Additional | 38.1% |
Bonuses
Cash bonuses are taxed in the same way as other paid earnings (such as a salary).
Like a dividend, you can pay a bonus at any time during the year so they can be a useful way to top up your salary.
Bonuses count as a business cost so they can help reduce taxable profits for corporation tax.
However, when you consider income tax and national insurance, bonuses aren’t necessarily more tax efficient than dividends.
What’s the best way to pay myself?
Many business owners opt for a combination of a salary, bonus and dividend to ensure they make full use of the various allowances, build their entitlement to the state pension and pay as little tax as possible.
What is right for you will depend on your circumstances and your business goals.
Our guide to salaries and dividends has more information about extracting profits from your business.
Get in touch to see how we help you enjoy life outside of work.
