For the self-employed payday is not as straightforward as it might seem.
Juggling wages, business overheads and loans can mean that when it comes to making a payment to yourself as a business owner the decision of "how much" can depend entirely on "how much is left".
I've seen examples of what can happen when you take too much or when you don't take enough but I want to discuss small company owners taking drawings compared with a wage or salary from their business.
Company owners who take a wage are paying their taxes through the Paye system like any other employed person. They may do this because the working shareholders have an agreement to pay based on hours worked or perhaps it's the security of knowing that your tax obligations by the end of the year are up to date.
With a regular payslip it's easier to prove a regular income if you're trying to borrow personally. Income for ACC purposes is also certain.
A drawback is paying too much tax if the company makes a loss.
If you have tax debt the IRD will prefer you to take the wage option. If you're uncomfortable about managing money then this might be the easiest way to go to get paid.
Taking a drawing is taking money out of the company regularly but paying tax on the shareholder salary that's distributed by book entry at the end of the year.
The shareholder salary is the profit from the company.
It's important to remember that you don't pay tax on drawings but on the profit/salary.
Tax is paid in lumps called provisional tax with a square-up called terminal tax and varies depending on the profit. Sometimes people forget to plan for these payments and have no money to pay the tax.
Funding options exist to help people who need finance for tax.
There is a danger, it is possible to take too much in the way of drawings and you may end up with the IRD or some bills not being paid as a result.
ACC can be a risk if you don't have the agreed Coverplus Extra in place.
Jeremy Tauri is an associate at Plus Chartered Accountants.