Are you running a company in New Zealand and wondering how to pay yourself as a business owner? Choosing between a shareholder salary and a PAYE salary can have big implications for your taxes, cash flow, and long-term planning.
Deciding on the right salary structure isn’t just about how much money you take home each week. It affects your income tax return, GST return obligations, and even your ability to manage tax audit risks.
In this blog, we’ll explore the differences between these two types of income and help you understand which might suit your situation best.
Shareholder Salary vs PAYE Salary: Overview
When you own a company, you have different ways to pay yourself. A shareholder salary is paid directly as a return on investment in the company. A PAYE salary is treated like regular employee wages and goes through the standard payroll system. Both have tax implications, reporting requirements, and benefits.
- Shareholder Salary: Paid from company profits and often linked to dividends or owner draws.
- PAYE Salary: Paid as regular wages, with income tax, KiwiSaver, and ACC levies automatically deducted each pay period.
The right choice depends on your business structure, personal tax situation, and how you want to manage cash flow. Many companies combine both approaches to optimise taxes and ensure regular income.
What Is Shareholder Salary?
A shareholder salary is typically drawn from the company’s profits. It may not be regular, and it is sometimes considered a dividend rather than wages. Shareholder salaries are often more flexible but require careful planning to avoid tax penalties.
Shareholder salaries can help business owners control the timing of income for tax purposes. They are especially useful for companies that have seasonal cash flow or want to reinvest profits before paying the owner.
Benefits of Shareholder Salary
Here are some key advantages of taking a shareholder salary:
- Tax Flexibility: You can time withdrawals to match lower tax periods, reducing your overall income tax liability.
- Cash Flow Management: Paying yourself based on profit ensures the company retains funds for growth or emergency expenses.
- Dividend Potential: Shareholder salary can complement dividends, allowing you to access profits without incurring extra payroll costs.
- Reduced Payroll Compliance: Unlike PAYE, you may have fewer regular reporting obligations, though proper accounting is still essential.
- Investment Planning: You can plan withdrawals around personal financial goals, making it easier to invest or save strategically.
What Is PAYE Salary?
A PAYE salary is treated as regular wages. The company deducts tax, ACC levies, and KiwiSaver contributions before paying you. This method is simpler for employees and ensures compliance with tax authorities.
PAYE salaries are predictable and create consistent cash flow. They also make it easier to prove income for loans, mortgages, or other financial requirements.
Benefits of PAYE Salary
Here are some reasons business owners might choose a PAYE salary:
- Predictable Income: Regular pay makes budgeting and personal financial planning easier.
- Simplified Tax Reporting: PAYE deductions are automatically managed, reducing the risk of errors on your income tax return or PAYE return.
- KiwiSaver Contributions: Regular deductions make saving for retirement simple and consistent.
- Loan Eligibility: Banks and lenders often prefer proof of consistent wages for mortgages or loans.
- Compliance Assurance: Ensures your company is following employment and payroll laws, reducing the chance of a tax audit.
Which Is Right For You?
Deciding between a shareholder salary and PAYE salary depends on your business needs, personal finances, and tax strategy. Many owners use a mix of both to balance benefits.
- Tax Efficiency: Combining shareholder and PAYE salaries may reduce your income tax and ACC levies.
- Cash Flow Considerations: Use shareholder draws during peak profit periods and PAYE for regular expenses.
- Retirement Planning: PAYE ensures contributions to KiwiSaver, compared to shareholder salary. NZ business owners can use other strategies to make additional investments or boost retirement savings.
- Loan and Credit Requirements: PAYE salaries often provide more reliable proof of income for lenders.
- Audit Readiness: Properly documented shareholder payments reduce risk during a tax audit.
- Business Growth: Flexible shareholder payments allow reinvestment in your company without reducing regular personal income.
Tips For Choosing The Right Salary Approach
Here are some tips to help you decide what works best for your situation:
- Consult An Accounting Firm: Seek advice from a trusted accounting firm services provider to understand tax implications.
- Plan For Tax Accounting: Make sure your strategy works with income tax return and GST return obligations.
- Consider Tax Pooling: Using tax pooling can help manage timing differences between company profits and personal tax liabilities.
- Review PAYE Returns Regularly: Ensure correct deductions and avoid penalties for underpayment.
- Document Shareholder Withdrawals: Keep clear records to satisfy IRD requirements and simplify any potential tax audit.
Conclusion
Choosing between a shareholder salary and a PAYE salary is a key decision for any business owner in New Zealand. Each option offers advantages, from tax flexibility to predictable income, and the right strategy often depends on your business’s cash flow, growth plans, and personal financial needs.
At PAS, we help business owners understand their options and implement the best strategies for their situation. Contact our team today to learn how our tax accounting and accounting services can help you optimise your salary, manage tax pooling, and ensure smooth PAYE return processing.
Frequently Asked Questions
1. Can I combine a shareholder salary and PAYE salary?
Yes, many business owners take a small PAYE salary for regular expenses and draw additional income as a shareholder salary to optimise taxes.
2. Do shareholder salaries require PAYE deductions?
Not always. Shareholder salaries taken as dividends are generally outside standard PAYE rules, but proper documentation is essential to avoid tax issues.
3. Which option is better for loan applications?
PAYE salaries are often preferred by banks because they provide consistent proof of income, making it easier to secure mortgages or credit.
4. How does tax pooling work with shareholder salary?
Tax pooling allows you to align tax payments on shareholder income with the company’s cash flow, potentially saving interest or penalties on late payments.
5. Will my choice affect ACC levies?
Yes. PAYE salaries include ACC levies automatically, while shareholder draws may require separate payments depending on how income is structured.
