A shareholder salary is an amount your company allocates to you as a working shareholder, usually at year end once the result is known. The company claims it as a deduction. You declare it as income in your own tax return and pay the tax yourself, because no PAYE is deducted during the year. It is not the same as a PAYE salary, where tax comes off every pay run, and it is not the same as drawings, which are cash you take out and which are not income at all.
The choice matters because each route is taxed differently and brings different duties. This guide explains each one in plain words, shows what a shareholder salary does to your tax bill, and works through one example with round numbers.
The three ways owners take money out
New Zealand company owners have three routes for taking money out, and people often confuse them. Here they are side by side.
| Route | What it is | Tax taken during the year? | Is it a company deduction? |
|---|---|---|---|
| Drawings | Cash you take out as you need it | No | No |
| Shareholder salary | An amount allocated to you, usually at year end | No | Yes |
| PAYE salary | A fixed wage paid through payroll | Yes, each pay run | Yes |
A fourth route sits alongside these: dividends, which are a share of the company's after-tax profit. We cover them below.
Two terms come up throughout, so here they are once.
- A shareholder-employee is a person who is employed by a company in which they also hold shares. Most owner-managers of small companies are one.
- The shareholder current account is the running record, in the company's books, of what the company owes you or you owe the company. Drawings, expenses you pay personally and money you lend to the company all move through it.
What drawings are, and what they are not
Drawings are cash taken out during the year. On their own they are not income and they are not a deduction for the company. They are a movement against your shareholder current account.
That has a consequence people miss. You do not pay tax on drawings. You pay tax on the profit or salary that is eventually allocated to you. If you draw $60,000 across the year and nothing is ever allocated to you as salary or dividend, the company has simply lent you $60,000, and your tax bill is not based on what you took out.
The risk sits in the other direction. If your drawings are larger than what the company owes you, the current account is overdrawn: you owe the company money. An overdrawn current account can attract deemed interest, and it is one of the more common unpleasant surprises at year end. If you are in that position, read our guide to overdrawn shareholder current accounts before your accountant finalises the year.
In practice, drawings are how most owners live from week to week. The salary or dividend decision comes afterwards and decides how those drawings are tied off in the accounts.
How a shareholder salary works
The usual pattern runs like this.
- You draw money through the year to cover living costs.
- At year end, your accountant works out the company's result.
- The company decides how much to allocate to you as a shareholder salary, with a book entry, and claims that amount as a deduction.
- The allocation is credited to your current account. It offsets the drawings you already took.
- You declare the salary as income in your own return and pay the tax.
Because the amount is decided in hindsight, it can be set to fit what the business actually earned. That flexibility is the main attraction. A wage fixed in advance can be hard to carry in a thin year. A shareholder salary can be sized once the numbers are in.
The flexibility comes with a rule of thumb about fairness to the tax system. Inland Revenue expects the pay of a working shareholder to be realistic for the work performed. Paying yourself an artificially low salary and taking the rest as dividends, purely to cut the tax, is not a neutral choice.
There is a second caution. Do not commit the company to a salary it cannot afford and then try to repair it later. If the company cannot afford the amount, that raises questions about a director's duties, including the duty not to trade recklessly.
What the tax looks like
The company side is simple. The company claims a deduction for the salary, so its taxable profit falls by that amount.
The personal side is where owners get caught. Because nothing is deducted at source, the tax on a shareholder salary is paid through provisional tax. Provisional tax is tax paid in instalments through the year, based on the previous year's result, with a wash-up at the end of the year. The wash-up payment is often called terminal tax, and people regularly forget to plan for it.
The first profitable year
The trap is the first profitable year. You pay the previous year's tax and the current year's instalments in overlapping periods. In practice this can mean funding close to two years of tax in one. If you fall behind, use of money interest applies, and it compounds daily on instalment arrangements.
If you expect a big first bill, set money aside from the first month of profit, not from the month the bill arrives. For options if instalments are already hard to meet, see our guide to tax pooling and provisional tax. If you already owe Inland Revenue and need credit, read business finance when you owe Inland Revenue.
What the rates are
This guide does not list tax rates. The company rate, the personal rate brackets and the rules for dividends are set by Parliament and Inland Revenue, and they change. Check Inland Revenue's current published rates before you work out your own figures, or ask your accountant to run them for you.
A PAYE salary is a different animal
A PAYE salary treats you as an employee of your own company. Tax is deducted each pay run, KiwiSaver can apply, and the amount is fixed in advance rather than decided in hindsight.
The benefits are real.
- Tax is already paid as you go. That removes the year-end provisional tax problem, because the tax has been paid through the year.
- A regular payslip. A payslip is useful evidence of income when you apply for a mortgage or other borrowing.
- Predictability. You know what you earn each month and so does the company.
The drawbacks are real too.
- Employer costs. On a market-rate role, expect to add roughly eight to ten percent on top for KiwiSaver, ACC and employer superannuation contribution tax (ESCT). Treat that as a rough guide, not a rule. Your own figure depends on your rate and your ACC classification.
- Overpaying tax if the company makes a loss. Tax is taken from the wage whether the company did well or badly, so a poor year can leave you having paid more than a year-end allocation would have cost.
- Employer duties. Paying a salary as employment income brings PAYE deductions and reporting, KiwiSaver obligations where they apply, holiday pay and leave entitlements, and employment records.
Many businesses combine the two. They run a modest PAYE salary for regularity and top up with a shareholder salary at year end. That gives you a steady payslip and a smaller year-end bill, while keeping flexibility for good and bad years.
ACC: the cost owners forget
ACC levies are charged on your earnings as a working shareholder. They are a real cost of paying yourself, and owners routinely forget them.
Two points to know.
- Rates depend on the classification unit, which reflects the work you actually do. A wrong classification can mean paying materially more than you should.
- Cover for working shareholders should be agreed and in place. ACC can be a risk if you do not have the agreed cover, known as Coverplus Extra, set up.
Ask your accountant or ACC to confirm your classification and your cover each year.
Dividends
A dividend is a payment from the company's after-tax profit to its shareholders. It is not a deduction for the company.
When a company distributes profit, it attaches imputation credits. These are credits that represent the tax the company has already paid on the profit being distributed. You declare the gross dividend, receive credit for the tax the company paid, and top up to your own marginal rate if that is higher. Your marginal rate is the rate you pay on your next dollar of income.
That gives a useful rule of thumb.
- If your marginal rate is close to the company rate, the choice between salary and dividend makes little difference to total tax.
- If your marginal rate is much lower than the company rate, a salary can be more efficient, because the company gets a deduction and you pay tax at your lower rate.
- If your marginal rate is much higher, dividends can defer some of the difference.
Dividends have their own limits.
- They require distributable profit.
- The directors must be satisfied the company passes the solvency test before declaring one. In plain terms, the company must be able to pay its debts as they fall due and its assets must exceed its liabilities.
- They generally need board authorisation, and the directors' resolution and certification should be on file.
A dividend also does not fix the problem of an artificially low salary. If the work you do is worth $100,000 and you pay yourself $30,000, with the rest as dividends, you should expect the question to be asked.
How much should you pay yourself?
Start with two figures and reconcile them.
- What the role is worth on the open market. What would the company pay someone else to do your job?
- What the business can sustain. Take your profit before your own pay, subtract what the business needs to keep for tax, for the working capital that growth consumes, and for a cash buffer. What is left is the ceiling.
If the market rate is below the ceiling, pay yourself properly. If the ceiling is below the market rate, you have a different problem, and it is not a pay decision.
A worked example
Anahera runs a small company. Revenue for the year is $285,000. Profit before her own pay is $132,000.
Through the year she has drawn $60,000, and her accountant has recorded that as her shareholder salary. On those figures the business looks like it keeps $72,000 of profit ($132,000 less $60,000).
Then she tests the figure.
- The market rate for her role is $105,000.
- The business needs to keep a $12,000 cash buffer and $6,000 for equipment.
- The ceiling is therefore $132,000 less $12,000 less $6,000, which is $114,000.
The market rate of $105,000 sits below the $114,000 ceiling. Anahera can pay herself properly and the business still retains $27,000.
Two things follow from this.
- The business was never earning $72,000 of true profit. Once she paid herself a fair rate, the real profit was $27,000. Paying yourself below market rate hides how well, or badly, the business is doing.
- Her personal taxable income rises from $60,000 to $105,000, and her provisional tax rises with it. She should plan for that before the instalments arrive, not after.
Now turn the numbers around. Suppose the ceiling had come out at $70,000 against a market rate of $105,000. The business would then be generating $35,000 a year less than the labour it consumes. The answer is a change to pricing or capacity, not a different salary.
Review the figure each year when the accounts are finalised, and again whenever your role changes.
What you must record
Whichever route you choose, the paperwork matters.
- Employment agreement. If you are paid as an employee-owner, you should have an employment agreement with the company.
- Approval of director pay. In a single-director company you can record the decision in a written resolution or minutes. In a company with several directors, director pay may need board approval.
- Current account movements. Reimbursements, drawings and repaid loans must be recorded properly and consistently, supported by receipts and accounting entries. These are legitimate arrangements only when the records back them up.
- Employer records. A PAYE salary brings holiday pay and leave entitlements, and the records that go with them.
Directors' fees are a separate category from wages. Depending on the facts, they can attract withholding obligations, for example where they are treated as a schedular payment. If you take directors' fees, check how they are treated before you pay them.
Where there is more than one shareholder, settle the fairness question early. If one owner works in the business and wants a salary, and another is a passive investor expecting dividends, the arrangement should be written down in a shareholders agreement. Otherwise the working owner's salary reduces the profit the other owner expects to share.
Which route fits
| If this is you | The route to ask about |
|---|---|
| Variable profit, comfortable setting money aside for tax | Drawings tied off with a year-end shareholder salary |
| You need proof of income for borrowing | A PAYE salary, even a modest one |
| Tax debt, or tax you struggle to fund at year end | A PAYE salary, so tax is paid as you go |
| Your marginal rate is well below the company rate | More weight on salary |
| Surplus profit the business does not need | Dividends, once the solvency test is met |
| Several shareholders with different roles | Agree it in writing before choosing |
This is general information and the right mix depends on your numbers. Get the mix advised by your accountant rather than deciding it from a calculator.
Frequently Asked Questions
Do I pay tax on my drawings?
No. You pay tax on the salary or profit allocated to you, not on the cash you drew. Drawings are a movement on your shareholder current account. The risk is an overdrawn account, which can attract deemed interest.
Is a shareholder salary the same as a PAYE salary?
No. A shareholder salary is allocated at year end and has no PAYE deducted, so you pay the tax yourself through provisional tax. A PAYE salary has tax deducted every pay run, is fixed in advance, and can carry KiwiSaver.
Can I pay myself a low salary and take dividends instead?
You can pay dividends if the company has distributable profit and passes the solvency test. But Inland Revenue expects the pay of a working shareholder to be realistic for the work performed, so an artificially low salary used purely to cut tax is not a neutral choice.
Do I pay ACC on a shareholder salary?
Yes. ACC levies are charged on your earnings as a working shareholder. The rate depends on your classification unit, which reflects the work you do, so check that your classification is right.
Can I choose a salary after the year has ended?
A shareholder salary is usually set at year end, once the result is known. Your accountant should record it properly, with approval and records in place, and you should plan for the provisional tax that follows.