It’s a common question for any new or growing, business owner in the hospitality sector – what’s the best way to pay myself, do I take a salary, dividends, or trust distribution, and what are the tax implications of each method?
Unsurprisingly, it’s a tricky question if you don’t have the experience and technical skillset to back up your reasoning, and the answer to the question is going to ride on a few factors. How you’ve structured your business, your personal financial situation, and the financial health of your business are all key.
Of course, all business owners want to start seeing a return on their investment and hard work as soon as possible, so if you’re considering starting your own hospitality business, or you’ve just started out, we’d highly recommend talking to a specialist hospitality sector accountant on what is likely to work best for you.
In addition to considering how to structure your pay, you’re going to need to consider when to pay yourself and what exactly you should be paying yourself. These are great considerations to explore with your accountant, particularly as when and what you pay yourself can impact your growth timeline and the value of your business. There are pros and cons to both that need to be considered.
When it comes to how to pay yourself, here are the options:
1. Salary/wages – for anyone that has been employed by someone else, this is pretty self-explanatory. You have the option to take a regular salary from the business, and the opportunity to determine how regular that salary is paid. Whether the option is right for you will depend on how profitable your business is, how often you personally require salary payments and your personal tax position.
2. Dividends – a dividend is a distribution of profit to shareholders, i.e. you and your business partners if you have any. A dividend however is only payable by your business to you if it has profits to make dividend payments from – your business can’t make dividend payments to you without profit. Clearly, this is a limiting factor, and if you need regular payments while you’re growing your business, you’ll need to consider another option and take dividends once you’re turning a profit.
3. Trust distributions – a trust distribution could be used by your business if you’ve structured it as a trust. A trust is a relationship where a trustee (commonly a holding company) carries on business for the benefit of other people (the beneficiary – which is likely to be you). Trust distributions can be wholly discretionary by the holding company, or they can follow an agreed fixed structure for payments to beneficiaries. This is clearly the most complicated method of paying yourself, but it can be incredibly tax efficient. We’d recommend considering this option and discussing it in detail with your accountant.
With so many factors, many of which can be technical and tricky for small business owners, taking advice on how to pay yourself is your best bet. Working with an expert from the get-go is key, especially if you want to consider all three payment options.