How Much Money Should I Take Out of My Business? Small Business Accountants Explain
Author: Russell SmithApril 18, 2012
Ever caught yourself wondering about how much money you should take from your business, but not really sure how to answer? Our Leeds accountants offer up tips on how to do it properly.
Being a contracted employee is easy.
You do your work, then at the end of the month, a lovely (or not-so-lovely) payslip is handed to you. There is your money. All the other bits — the pension, the tax, the expenses — have been dealt with by your employer. You’ve just got a cheque to cash. Or cash to pocket. You didn’t have to worry about anything but where your wage was going.
However, when you take the step from having a boss to being your own boss, things suddenly get a lot more complicated. Now, you are the employer, which means you become responsible for making those financial decisions.
You must decide:
- How much to take from your business
- How much to leave in the company
- How much you pay suppliers and debtors
- How much to set aside for tax
- How much to pay into a pension scheme
You’re also required to monitor your business’ cash flow, making sure you’ve balanced the books correctly. Thanks to these newfound responsibilities, our Leeds accountants often find they are being asked the question: how much money should I take from my business?
Sadly, it’s not an easy question to answer. It varies from business to business, industry to industry, person to person.
If you’re really concerned about your financial situation, it’s not a good idea to wait around and hope for the best. Fill out the form to the right of this blog to arrange a free, no-obligation financial consultation with our Leeds Accountants today!
If you think you just need a push in the right direction, though, keep reading. Below, you’ll find our Leeds accountants’ top tips for working out how much money you should take out of your business.
Small Business Accountants Tips for Taking Money Out of Your Business
Accounting can be intimidating. Working on your own finances can seem like an insurmountable task. Thus, when it comes to working out what cash you should be taking out of your business and what you should be leaving in, the whole process can seem more than a little daunting.
But it needn’t be that way. As with most things in life, the key to success is to break the process down into easily manageable, bite-sized tasks.
Here are the key points you need to know:
It Doesn’t Have to Be An Exact Science
Most people think that dealing with numbers is about pinpoint accuracy, but you can’t expect to be able to manage such tightly knit finances on your own. It takes years of education to become a qualified accountant capable of professionally managing a business’ money, so don’t expect to be able to do it perfectly yourself. Note that you don’t have to make numbers fit exactly. You can take out a sum, set a goal of another and still have some left over.
Also be aware that if you find you’ve taken too much, you can just put it back into the business. However, this can be troublesome from a tax perspective, so try to get your figures straight prior to filing your tax returns.
Work Out Your Required Income
How much money do you need to live? How much money do you need to maintain your current lifestyle? Before thinking about anything else, understand how much money you need to be taking out of your company. If you need all of it to stay alive, then take it all. If you don’t and you have surplus, then you can look at your options.
Know Your Tax Obligations
You will have to pay tax on your earnings; both corporation and income tax. Maybe VAT as well. Be aware of what tax you will owe so you can work out your net profitability. From that, you can work out how much you’ve actually got that belongs to either you or the business.
Be Aware of Your Business Targets
Before you decide to take money out of your business, establish what your minimum balance for the company accounts should be. How much money do you want in your business for things like expansion, investments, additional supplies, etc?
It’s also worth noting that, if you’re planning on acquiring loans to grow your company, a bank manager will be looking at your net assets on your balance sheet before they go anywhere else. The more you’ve taken out of it, the less likely you are to get the loan you need. If you’re planning on getting more investment soon, be conservative with your cash flow.
Don’t Be a Saver
Saving for a rainy day is a good idea in your personal life. In business, it isn’t. Don’t just leave money sitting around, because you may want to use it later. There are so many ways to invest your money that letting it sit in a company account is just plain wasteful.
Take Advantage of Tax Allowances and Differing Rates
When taking cash out of your business, make sure you take advantage of different tax rates and allowances.
Currently, the personal tax allowance is £11,500 for income, whereas for dividends it is £5000. This means that you can take nearly £17,000 out of your business for personal use without it costing you anything in tax. If you are able to take advantage of a partner’s allowances as well, you can stretch this to untaxed income up to £33,000.
After that, different rates apply dependant on how much you want to earn. Because of this, it may make more sense to take your earnings in dividends, or it may be more financially viable to take more as income. It depends on exactly how much you earn in total.