I was chatting with a client a couple of weeks ago, about the need to pull money out of her business on a regular basis.
For most of my clients, it’s one of the first things we do – putting that regular monthly income in place, because it makes such a huge difference to your life.
It’s at the core of my Rock Solid™ system, which I use with all my clients whether we’re working together 1:1 or they’re following a self-study programme.
When we looked what she wanted to achieve with her lifestyle and investment goals, I suggested that she might want to start paying herself a bit more money from her business each month.
But she said she couldn’t do that, because she’d end up earning more than £50,000, which she doesn’t want to do because of tax and stuff.
And it got me thinking. Is this £50k threshold an arbitrary figure we’ve come up with? Why DO so many business owners seem to be hooked on it?
The main reason comes down to how we’re taxed in the UK.
We all pay tax on the income we receive, which breaks down like this:
- The first £12,570 is tax free;
- Then you pay 20% tax on the next chunk, up to £50k;
- And when your total income goes over £50k, you pay 40% tax.
(The actual figure is £50,270 but I’m rounding it down to £50k for ease!).
The important thing here is that you only pay tax on the income that falls WITHIN that band.
If you earn £50k or less, you’re going to pay 20% tax.
If you earn £51,000 then yes, you’re going to pay higher rate 40% tax – but ONLY on the £1,000 that is over the threshold, and not on the whole amount.
And actually, sometimes not even then (there are things you can do to reduce the amount of tax you pay, which I’ll come to in a minute!).
Another reason people sometimes don’t want to pay themselves more than £50k is to do with losing Child Benefit.
Basically, there’s been a system in place for receiving Child Benefit in the UK, where if you earn more than £50k a year, they start to claw back some of the payments you would otherwise be entitled to.
It’s called the High Income Child Benefit Charge. When you reached £60,000 a year, you got no child benefit whatsoever.
This did recently change in the March budget so that now as an individual, you can earn £60k annually before they start knocking down the top Child Benefit. The top of the taper is now £80,000, which means lots more households will be able to hang on to their entitlement than ever before.
But it’s still not a very fair system – which is also in the process of being overhauled – because if you have a household where one parent earns £60k and the other earns nothing, they will start to have their Child Benefit reduced. Whereas you could have two parents both earning £59,500 with a combined household income of nearly £120k, and not lose it at all.
From 2026, this will become a household criteria and for now, pushing up the threshold is helping some people get out of a hole.
But anyway!
For lots of business owners, it’s contributed to the reasoning that you shouldn’t earn too much money and shouldn’t pull too much money out of your business.
Of course, this can be a mindset issue, as well as a practical issue – because we don’t like the idea of paying more tax than we feel we should.
In the employee world, it’s really common that people want to get away with paying as little tax as possible.
Even as business owners, we’ve all come across those people who drive around in high-end cars and run a successful venture, yet proudly announce how little tax they’ve paid because on paper their business only makes a profit of £20k a year.
But what I really want to say to you today, is that there’s NO reason why you can’t earn more. As I often say, 60% of something is better than 100% of nothing. Why limit how much you draw out of your business and ultimately limit your life, just because you’re worried about the tax you’ll pay on that extra money?
If you pull an extra £1,000 out of your business that takes you into the higher rate tax bracket then yes, you’ll need to put £400 of it away for tax. But what could you do with that extra £600?
An extra £600 a month is money towards a holiday. It’s more family days out. It’s more takeaways, more bottles of gin, more shoes or whatever else you want to spend it on.
Or it’s £600 a month you can use to pay down your mortgage and save yourself a fortune in interest. It’s money you can invest for your future. It’s money you can put into a university fund for your kids. It’s money you can do whatever is important to you with.
But if you’ve got yourself so caught up with the idea that you can’t pull out more than £50k or you’ll have to pay higher rate tax, you’re going to miss out on all those opportunities.
I suppose opportunities are one of those things I’m really passionate about.
Because let’s face it, life is unpredictable, and life can be short. Life is certainly too short to be limited by just taking out of your business exactly the right amount to pay your bills, for fear of paying a little bit of extra tax.
I mean, what’s the worst that can happen?
There are loads of things you can do to reduce your personal tax bill – like putting money into a pension, using Gift Aid contributions and lots of other things (in a completely ethical way, of course).
It’s just about understanding exactly what your options are and figuring out the right plan of action for you and your family.
If you want to chat it all through, here’s where you can reach me now.
Or just click here to see all the ways I can help – including freebies, self-study options and my signature Rock Solid™ programme!
Until next time,
Claire
