The mistake that left one business owner without an income
One of our clients recently went through two very tough years.
His company barely turned a profit… which put him in a difficult position personally.
Because he’d been taking most of his income as dividends, he suddenly found himself with very little to live on.
A company can only distribute the profits it actually makes — and without profits, there are simply no dividends to take.
To keep cash flowing, we had to change his status to employee so he could draw a proper salary and support his family.
In my last article, I talked about the recent changes to dividend tax in the Budget. Those changes have made dividends less attractive for many business owners and forced a rethink about how to take money out of the business.
Today, I want to give you a fresh way to think about that decision.
If you run your own business, you actually wear three hats:
Director. Shareholder. Employee.
And each one pays you differently.
- A director can receive director’s fees.
- A shareholder is paid through dividends.
- An employee takes home a salary through payroll.
You don’t need to choose just one — many owners are a blend. But it’s not always straightforward, because each option comes with consequences.
Here’s an important example…
Minimum wage rules apply if you’re an employee.
If you put yourself on payroll — even symbolically, just to keep up NI contributions — you need to be really careful that the law does not see you exactly like any other employee on your payroll. Employees must be paid at least the national minimum wage. So, you should not have an employment contract with your company but instead pay yourself just as a director.
Right now, the minimum wage is £25,397 a year for full-time work. As the owner, you’re almost certainly working full-time (and probably far more). So, if you’re paying yourself a token salary well below that threshold, you’re technically in breach of minimum wage regulations if you are an employee.
It’s an easy mistake to make… but one that carries real compliance risk — and one HMRC can detect.
And of course, two other factors I’ve already mentioned matter enormously: your profit level — as in the story above — and the recent changes to dividend tax.
When we manage your company’s finances, we discuss this with every client. We’re not allowed to give personal advice, but these decisions do affect your company and its profitability.
That’s why it’s so important to think carefully about which “relationship” with your company you prioritise — director, shareholder, employee — and therefore how you choose to be paid.
This is exactly the kind of hands-on, proactive financial management you should expect from your accountant.
And it’s the approach we bring to every part of your company’s finance function — helping you understand your financial picture, make stronger decisions, budget wisely, plan for the future, and keep everything running smoothly.
If you’re ready to take your finance function to the next level and want a team that works proactively alongside you, give us a call on 01279 647 447, or email garry@insightassociates.co.uk to book a consultation.
Warmly,
Garry
