Drawing wages from your company
It’s one thing to have a successful business that makes money, but how would you use the profits to pay personal expenses or invest?
With a sole trader business, it’s easy. As you are the one earning the money, it is yours to spend how you wish, provided you take care to save some to pay any tax due.
When you have a limited company, things get more complicated. A limited company is treated as a separate entity in the eyes of the law. This means that drawing money from it will be taxed as personal income. A popular method of doing this is to pay yourself a wage from the company as an employee.
What are the advantages of drawing wages?
The main advantage of this method is that you can put the wage down as an expense to the company, reducing its profits and, therefore, reducing corporation tax. The other benefits are that you can use your personal tax and National Insurance Contribution (NIC) free allowances, resulting in an amount of money you can draw without paying any tax. You can also use this method to contribute towards your NICs by paying yourself enough to go over the contribution threshold.
What are the disadvantages of drawing wages?
The main disadvantage of paying yourself a wage is that when you go over your tax-free allowances, the amount of tax you would pay on the wages soon adds up, which means you could be spending a large amount of personal tax and NICs that eclipses the savings to your corporate tax. This individual tax would be paid out by the company rather than your own pocket, though. In addition, if you do not already have a payroll system in place, you will need to set one up and be prepared for Real Time Information filing, which can be a time-consuming task.
If you would like more advice or information regarding the above, or with any aspect of sole trader or limited company accounting, please do not hesitate to contact us.
Adam is our managing director and a fully AAT-certified accountant. Adam founded Short Accounting in 2014 with the aim of helping business owners with their accounting and tax needs so that they can focus on growing and managing their businesses.
Over the years Adam has helped thousands of SMEs, sole traders, limited companies and more with the full range of accounting services. He’s a firm proponent of adopting the latest in accounting tech to help streamline processes to ensure that all of our clients get the best service possible.
