True wealth is NOT how much you earn.
It’s how much you get to keep! And how much is actually in your pocket (or your bank account) at the end of the month.
So why does everyone get so caught up on how much money they’re earning?
It’s the stuff we see all over social media, obsessing over having a 6- or 7- figure business. You just need to sell more courses. Create a passive income product. Build the perfect funnel. Make more money, make more money, make more money.
Because when you make more money, then you’ll have more money to spend, won’t you?
It’s pedalled as THE answer. The answer surely is just to earn more money.
But it’s not really, is it?
Because if you don’t organise what’s going on behind the scenes with your money, all that happens is you earn more, you spend more, you pay more tax and you’ve got NO more money to show for it.
The truth is it’s NOT about how much money you’re making…but how much you get to keep. So in today’s blog, we’re going to start making sure you’re looking at YOUR finances in the right way!
It’s so easy to focus on the big shiny figures, but never actually look at what those mean, both for your business and for you as an individual.
The first step is to sit down and work out how much money you need each month.
You probably already got an idea of what that figure is! It might be the amount you need to pay your mortgage and your bills. It might be enough to pay half of the bills at home, if you split everything with your partner. It might be that you’re the one earning all the money and you need enough to support your whole family.
But once you know what that number is for you, the next step is to figure out the easiest or quickest or least stressful way to make the money that you want.
Which is then thinking about how you get paid and how the money arrives in your PERSONAL bank account (not just the money that comes into your business).
You know I’m a great believer in paying yourself a regular wage each month.
It doesn’t really matter what you call this – whether it’s wages or drawings or salary or dividends. The key point is you need the same amount coming into your personal bank account each month, so you can budget and you know whether you’re coming or going.
But how you actually account for this and how you choose to draw the money out of your business can make a massive difference, depending on the way that you choose to do it. So let’s look at the different options!
If you’ve always been employed, you’ll be used to the fact that when you get paid each month, you have to pay tax and National Insurance.
They get paid at pretty much set rates – no tax on the first £12,500 a year you earn; 20% from there up to £50,000; and then the higher rate threshold kicks in above that.
As an employee, you can’t do much about the amount of tax you pay. If your salary is £55k or £80k a year, you’re going to pay some higher rate tax and there’s very little you can do.
But as a business owner making this much with a successful business, you might be thinking “how can I pull this money out and not pay more tax than I have to”? Because ultimately, although we all need to pay tax, you only want to pay your fair share.
The first thing is to look at what you actually draw as salary. As a director of a limited company, you are an employee of your company, and you can take a salary.
Most directors take a minimal salary. Enough that the company will pay National Insurance Contributions on your behalf (so you still get your state pension when you retire), but not so much that you as an employee lose any of your pay to National Insurance.
As it stands at the time of writing, this is £737 a month.
So what about a higher salary than that? Can you take a higher salary?
Well – of course you can!
Some accountants will tell their clients to take a salary of £10,000 or £12,000 a year to use all of their personal allowance, but it does depend on your circumstances (obviously it’s always advisable to talk to your accountant about the best way for you to pull money out of your business).
The way to then top up your salary each month is with dividends. We all get to receive £2,000 of dividends each year without paying tax and you’ll pay tax on the rest at different levels, depending how many dividends you take.
And that’s the reason that most directors only earn up to £50k per year. Because once you get over that threshold, you start to lose a massive bit (32.5%) to your tax.
32.5% is a lot. So you’ve got to take a LOT more than you think out of your business, to end up with the amount you need in your personal account.
Here’s what I mean. Let’s say you’re a business owner and you want to pull £100k a year out of your business. If you pull out all of it in your own name, as a salary and dividends, you’re going to pay:
- No tax on the first £12,500
- 7.5% tax on dividends up to £50,000
- 32.5% on the £49,730 dividends above this
- Total tax bill = £18,840
- So the total you take home = £81,160.
Which is not quite the £100k in your personal bank account that you wanted!
But if you made your spouse a company director and split the shareholding 50:50, you could each take out £50k and pay a lot less tax (as long as they don’t have earned income of their own) – because you both have tax allowances to use.
So if each of you took £50k, you’d pay:
- No tax on the first £12,500
- 7.5% tax on dividends up to £50,000
- Total tax bill = £2,657
- So the total you each take home = £47,342
Which is £13,525 a year more in your family’s pocket, rather than going to HMRC.
Doesn’t that sound better?!
If your other half has a job of their own, you may still be able to allocate them some dividends and reduce your tax bill a bit – but it all depends on your personal circumstances.
One of the things Financial Advisers (like me!) do all the time, is help our clients structure the money they invest and the money they take out of their business, so it’s in the right name, ownership and tax wrapper.
Because this can save you thousands of pounds in tax…and earn you thousands of pounds more in interest!
And it’s something I love to do with my clients as part of my signature Wealth Builder Experience.
Working together over 6 months, we’ll make sure you’re maximising every single penny you make and create your Wealth Plan, balancing what you need and want today with your future dreams and goals.
From rental properties to investing in stocks and shares; sorting out your will to paying off your mortgage (and everything in between!) – this is about feeling totally calm in control of your money.
Step-by-step with my total support, taking you closer to everything you want from your life, without every worrying how you’ll pay for it!
So if The Wealth Builder Experience sounds interesting, just click here to drop me a message and find out more about how it all works.
Ultimately – and while I know it’s a cliché – knowledge is power.
And that’s never more true than when it comes to money and making sure you keep (and grow) as much as possible, of your hard-earned cash!
Until next time,
Claire