How to Pay Yourself as a Franchise Business Owner

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Having trouble deciding how to pay yourself as a franchisee? Managing business finances can seem complicated, but once you’ve established the best way to earn a good salary while handling your taxes efficiently, you’ve tackled the hardest part. Here’s our guide to optimising your income. 

Before we get started, it’s worth considering whether it’s a good idea to limit your income in the first few months of your business’s life. Setting up and running your own franchise unit involves a lot of time and energy in the initial stages, but you should be prepared to sacrifice some of your take-home pay. 

While you might deserve a decent salary, many entrepreneurs opt to give themselves a basic wage and put the rest of the business’s revenue back into the company. Taking this step will help you secure the future of your franchise unit. 

Salary vs dividends

Once your business is generating a healthy revenue, there are two main ways you can pay yourself: through a director’s salary or with dividends. Here’s a quick overview of the two methods.


If you choose to take a salary in the same way employees would, you take your earnings through the PAYE (Pay As You Earn) system before tax is deducted from your business’s profits. 

As an individual, you’ll pay 20 percent tax on earnings up to £50,000, 40 percent on earnings up to £150,000 and 45 percent on earnings over £150,000.

Advantages of taking a salary:

  • It’ll decrease your business’s profit, and therefore its tax bill

  • You won’t pay tax on £12,500 of your earnings

The government provides tax credits for businesses carrying out research and development (R&D) to benefit their industry, and many of the claims are based on labour costs - if you work in R&D, it might be worth taking a salary to benefit from the tax credit

Disadvantages of taking a salary:

  • It’ll be subject to income tax, National Insurance Contributions (NIC) and pension contributions

  • You’ll have to process it in the same way you would your employees’ salaries, through the PAYE system - this means registering as an employer through HMRC, even if you’re the only director

As a result, if you’re in the ‘higher’ or ‘additional rate’ tax bands, earning more than £50,000 per year, it could be more efficient to take your earnings through dividends. 


You can make money through dividends by taking your earnings from the business’s profits after you’ve paid its taxes. Usually, shareholders get paid dividends and everyone receives a fair amount, according to the shares they hold. Officially, the director(s) must ‘declare’ the final dividend payment and keep the minutes of the meeting. 

For this system to be effective, your business must make a good amount of profit after tax has been deducted. 

Advantages of taking dividends:

  • Your individual tax rates will be lower (7.5 percent on earnings up to £50,000, 32.5 percent on earnings up to £150,000 and 38.1 percent on earnings over £150,000)

  • You won’t pay tax on £2,000 of your earnings 

Disadvantages of taking dividends:

  • Unlike PAYE salaries, which are taken from a business’s profit before its tax is calculated, dividends are not classed as valid expenses, so you pay tax on them

  • You won’t be contributing a large enough National Insurance Contribution (NIC) to earn a state pension

Other ways to manage your tax obligations

One way to make sure you’re managing franchise finances efficiently is to review your outgoings. Businesses can avoid paying tax on certain payments and you can limit your taxable profit by claiming tax relief on expenses such as those associated with:

  • Employee pension and retirement programmes

  • Training schemes

  • Office technology, equipment and stationery

  • Company cars, fuel and parking fees

  • Travel, accommodation, food and entertainment

  • Healthcare insurance

  • Childcare 

  • Charity donations

Finding the ideal solution

Many business owners opt to split their earnings between a salary and dividends. The best solution may be to pay yourself enough through the PAYE system to become eligible for state pension, whilst avoiding the higher levels of tax associated with salaried income. Then, you can benefit from the lower tax percentages of dividend earnings. 

Usually, this system involves taking around £8,000 as a salary and the rest through dividends, but this amount will vary depending on how many staff members you employ. 

The GOV.UK website is a helpful resource for anyone who wants to find out more about their tax obligations. 

How to pay yourself as a business owner - an example

The government has developed an example of the way you might split your earnings between a salary and dividends: 

Let’s say you want to pay yourself £32,500 this year. You might choose to divide your income and take £29,500 in wages and £3,000 in dividends. You have a tax-free allowance of £12,500 (for the 2020/21 tax year), so if you take this from your £32,500 total, you’ll only pay tax on the remaining £20,000. 

Your earnings are under £50,000, so you’ll pay 20 percent tax on your salaried income. Taking your £3,000 in dividends away from your taxable £20,000 leaves you with £17,000 in wages. 

Next, you need to calculate the tax you’ll pay on your dividends. You get a £2,000 tax-free allowance, so you only need to pay tax on the remaining £1,000. Again, you’re earning under £50,000, so you pay 7.5 percent tax on dividends. 

Combining your salary and dividends, your tax obligations look like this:

You’ll pay 20 percent tax on £17,000 (=£3,400)

You’ll pay 7.5 percent tax on £1,000 (=£75)

So, your total tax bill will come to £3,475. 

(Source: GOV.UK)

More information on how to manage franchise finances

Point Franchise is committed to helping franchise owners understand how to operate a business effectively. Every day, we publish articles on a huge variety of topics relating to the franchise industry. 

For more advice on how to pay yourself as an entrepreneur, see our guide to understanding the ins and outs of the franchise owner’s salary. You might also be interested in reading up on franchise accounting basics or how you could finance a franchise unit with a small budget.

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