Paying Your Own Salary from the Business
The small business franchise you will be starting can be designed to pay you a full-time wage, or could be set-up as a part-time enterprise to improve your overall personal finance situation. Whatever type of income you are expecting, how you organise the payments to yourself - usually called drawings - should be looked at closely by you and your financial advisor.
It’s easy to think that you can pay yourself any salary you like as you own the franchise, but there are a number of areas you need to consider before you set your salary level, when you pay yourself, and how this affects any other income you may have from another job for instance. it’s vital that you take financial advice to maximise your income and minimise your tax liability.
Full Time FranchisingIf you intend your new franchise business to become your sole source of income, you have a number of choices to make regarding the format that your small business will take. This decision will have an impact on how your are treated for tax and National Insurance contributions.
Part-time FranchisingSmall business franchises that are operated on a part-time basis will usually be formed as sole trader businesses. In this scenario you are the sole proprietor of your franchise business and are, therefore, responsible for your own tax and National Insurance contributions. Mixing your usual day job and a small business is not complex as long as you keep up-to-date accounts, as you will have to pay tax via the self-assessment system on the money you earn from your franchise.
You may also have to pay an additional classes of National Insurance contributions. Always get financial advice from your accountant as they may be able to suggest some changes to your accounting period for instance that could mean you pay less tax. Remember, tax avoidance is completely legal, whereas tax evasion is illegal.
Tax and Your SalaryThe salary that you draw from your small business franchise has to be put into the context of the type of business format your franchise takes. Take financial advice before you make this decision as the more complex your franchise’s legal status, the more complicated tax records you have to keep. The type of franchise business you want to start may have an obvious business format, but still consult your accountant for personal finance advice.
Sole TraderThis type of business is the most simple to set up. There are no formalities to go through, you simply inform your local tax office by completing form CWF1 that you are starting a new small business. You can take as much out of your new business as you like as a salary, but remember that the money you make is taxable.
PartnershipsTwo or more people can set-up a small business partnership. If you want to start your franchise as a partnership, either full or part-time, each of the partners in the business must register as self-employed. Each partner then makes an annual self-assessment tax return. It’s a good idea to take some legal advice and draw up a partnership agreement. This will detail how much money each partner can take as salary. Don’t forget, you need to leave enough money in the partnership to pay your tax bill when it arrives and National Insurance contributions.
Directors of Limited CompaniesIf your franchise will be based on a limited company that you become the director of, you will in effect become the employee of that company. You will normally have to pay income tax and National Insurance via the PAYE system your franchise will have to set up. Don’t forget, though, that as a company director, you also have to complete a self-assessment tax form as well.
The salary that you take from your franchise should be governed by what your small business can afford. If you are running your franchise full-time, you may have to take a salary, but think about your actual living expenses. Cutting your salary in the early months or even years of your new small business could have beneficial effects as you have more money to invest in the future of your business. And don’t forget, the franchise royalty payment and of course the money the tax man will demand from you and your business.