What not to do when paying yourself as a business owner: Avoid these costly mistakes

Published 25 September 2025

Paying yourself might seem simple - but one wrong move can cost you in tax, cash flow, or even legal trouble. Whether you’re a sole trader or running a limited company, understanding what to avoid is just as important as knowing what to do.

Here are the most common mistakes business owners make when paying themselves - and how to steer clear of them.

1. Withdrawing too much too soon

It is tempting to take out large sums when the business is doing well. But:

✅ Overdrawing profits leaves your business underfunded
✅ You might trigger unnecessary higher-rate tax charges
✅ It limits your ability to reinvest or build reserves

Do this instead: Pay yourself a steady, planned amount. Build up business savings for lean months or growth.

2. Not setting aside tax money

One of the biggest financial shocks for new business owners is the tax bill.

✅ Many forget to save for Self Assessment, Corporation Tax and VAT
✅ Penalties and interest can follow late payments
✅ It disrupts both personal and business cash flow

Pro tip: Open a separate ‘tax pot’ account. Save 20–30% of each payout or profit for tax. Discuss this with your accountant to make sure you are saving enough.

3. Mixing personal and business finances

This causes confusion, messy records, and potential compliance issues:

✅ HMRC may question deductions or income
✅ Makes bookkeeping more stressful than it needs to be
✅ Impacts business valuation and credibility

Solution: Always use separate business accounts and only pay yourself through proper channels (salary, dividends, drawings).

4. Relying entirely on dividends (for company directors)

Dividends can be tax-efficient, but they’re not guaranteed:

✅ You can only pay dividends from retained profits
✅ Overusing dividends can attract scrutiny
✅ No pension or benefits are built in

Another approach: Combine a salary with dividends and pension contributions. Discuss this with your accountant to figure out the best mix of salary and dividends for you that tax year.

5. Ignoring pension contributions and non pension investments

Many business owners see pensions and non pension investments as optional - until it is too late.

✅ Missed tax relief and long-term growth opportunities
✅ Heavier reliance on selling the business later
✅ No backup if plans change unexpectedly

Fix: Even small, regular pension and investment payments can add up significantly - and reduce your tax bill.

6. Not getting expert advice

Trying to do it all alone might seem frugal, but it can cost you more long-term:

✅ Missed allowances or tax breaks
✅ Risk of penalties or poor planning
✅ Slower business and personal wealth growth

What to do: Work with a financial planner and accountant who understand small business. It is an investment, not an expense.

Final thoughts: Pay yourself smartly, not just quickly

Mistakes in how you pay yourself can compound over time. But with the right strategy, you can stay compliant, optimise tax, and grow both your personal and business finances.

📞 Book your no-obligation consultation to discuss how your business finances can be optimised for you.

Warm wishes

Shalini

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