How does a shareholder-employee salary work in New Zealand?
A shareholder-employee can pay themselves a salary from their company, which is deductible for company tax and subject to PAYE. This differs from dividends, which are paid from after-tax profits. The optimal split between salary and dividends depends on the shareholder's personal tax rate and the company's imputation credit position.
Detailed Explanation
## Shareholder-Employee Salary in New Zealand
### What Is a Shareholder-Employee?
A shareholder-employee is a person who holds shares in a company and also performs services for that company. In a typical small NZ company, the founder owns all the shares and also works in the business. They can pay themselves as an employee (salary), as a shareholder (dividends), or a combination of both.
### Drawing a Salary — PAYE Obligations
A shareholder-employee who draws a regular salary is an employee for PAYE purposes. The company must: register as an employer with IRD; calculate PAYE on each salary payment at the employee's correct tax code; deduct PAYE (and ACC earner's levy) from each pay; file Payday Filing returns (within 2 working days for electronic payroll); and pay PAYE to IRD by the relevant due date. KiwiSaver also applies unless the shareholder-employee opts out. The salary is a deductible business expense for the company — this reduces the company's taxable profit before the 28% corporate rate applies.
### Year-End Salary Adjustments
Many small company owners take drawings during the year (treated as a shareholder loan) and declare a final year-end salary after the accounts are prepared. This lets them set the salary to achieve the most tax-efficient outcome once the year's total income is known. For a year-end salary to be valid and deductible, it must be declared before the company's tax return is filed and actually paid (or recorded as a creditor in the accounts). PAYE must still be calculated and paid for the period.
### Salary vs Dividends — Key Differences
Salary
deductible for company tax; reduces the company's 28% tax bill. Subject to PAYE at the shareholder's marginal personal rate. Also subject to ACC earner's levy (approximately NZD 1.60 per NZD 100 of earnings) and employer KiwiSaver if applicable.
Dividends
paid from company profit already taxed at 28%. Imputation credits (representing the 28% company tax paid) are attached. A NZ-resident shareholder only pays additional personal income tax to the extent their marginal rate exceeds 28%.
Example — NZD 100,000 company profit
- Paid as salary: company pays NZD 0 tax (fully deductible), shareholder pays personal income tax on NZD 100,000. At mixed rates up to NZD 100k, approximately NZD 23,920 personal tax. Net to shareholder: NZD 76,080. - Paid as fully imputed dividend: company pays NZD 28,000 tax, NZD 72,000 dividend with NZD 28,000 imputation credits. If shareholder's marginal rate is 33%, additional personal tax = 5% x NZD 100,000 = NZD 5,000. Net to shareholder: NZD 67,000.
In this example, salary is more tax-efficient for a 33% taxpayer because it avoids 28% company tax that cannot be fully offset by imputation credits. The crossover depends on the shareholder's total marginal rate.
### Optimal Structure in Practice
Many NZ accountants recommend a salary up to approximately NZD 70,000-80,000 (staying within the 30% tax bracket) and paying the balance as dividends. This captures the deduction benefit on salary while keeping salary income in the 30% bracket rather than the 33% or 39% brackets. Shareholders on the 39% personal rate (income over NZD 180,000) may prefer to retain more in the company at 28%.
### Reasonable Salary Requirement
IRD expects the salary to reflect the actual services provided. Paying zero salary while taking all income as dividends, when the director performs substantial work, invites IRD reclassification of dividends as salary with PAYE assessments and penalties.
Source: https://www.ird.govt.nz/roles/shareholder-employees
Real-World Examples
Solo founder optimising salary and dividends
A founder owns 100% of a company earning NZD 150,000 net profit before salaries. She pays herself NZD 80,000 salary (PAYE deducted). Remaining company profit: NZD 70,000 x 28% = NZD 19,600 tax. After-tax profit NZD 50,400 paid as a fully imputed dividend. Her 33% marginal rate on the dividend means NZD 2,100 additional personal tax. Total combined tax is lower than if she had drawn all NZD 150,000 as salary.
Year-end salary declaration
A contractor company owner takes NZD 5,000/month drawings during the year (booked as a shareholder loan). In May, the accountant prepares the year-end accounts, determines company profit is NZD 60,000, and declares a NZD 60,000 shareholder-employee salary. PAYE is calculated and paid as a year-end adjustment. The salary eliminates the company's taxable income and clears the overdrawn loan account.
High-income founder on 39% marginal rate
A founder with NZD 200,000 company profit and additional investment income sits in the 39% marginal rate bracket. Paying all company profit as salary costs 39% personally vs 28% in the company. They retain NZD 120,000 in the company (taxed at 28%) and pay NZD 80,000 as salary, building imputation credits for future distribution.
Common Mistakes to Avoid
- Forgetting to pay PAYE on shareholder-employee salaries — treating it as an owner's draw without PAYE is a compliance error and creates personal liability for unpaid PAYE
- Setting salary at zero to retain all profit in the company — this works tax-wise but the owner loses ACC income-replacement entitlements and may trigger IRD scrutiny
- Not updating the salary for PAYE when declaring a large year-end adjustment — PAYE on a year-end salary needs to be paid to IRD even if it is just an accounting entry
- Assuming dividends are always more tax-efficient — for most founders earning NZD 60,000-120,000, salary is cheaper overall once the company tax saving and ACC entitlements are factored in
Frequently Asked Questions
Does a shareholder-employee salary need to be at market rate?
IRD expects the salary to reflect the actual services provided. For a sole shareholder who is the only employee, there is no strict market-rate test for deductibility, but the salary should be commercially reasonable. Paying an excessive salary to a spouse who does minimal work would be challenged under the income splitting rules.
Can I pay my spouse or partner a salary through my company?
Yes, if they genuinely work in the business at a rate that reflects the services they provide. A salary paid to a spouse for genuine work at market rates is deductible. However, paying a spouse primarily to split income when they do little or no work may be challenged by IRD as a tax avoidance arrangement.
What is the difference between a shareholder loan and a salary?
A shareholder loan is money the owner takes from the company to be repaid later — not income and not deductible. A salary is income for services rendered and is deductible. If a shareholder takes drawings without declaring a salary, the company has an overdrawn shareholder current account. This may require interest to be charged (at IRD's prescribed rate) to avoid a fringe benefit tax issue.
Do I pay ACC levies on dividends?
No. ACC earner's levies apply only to employment income (salary and wages), not dividends or investment income. Dividends do not generate ACC entitlements. This is one reason some founders prefer more salary — it builds ACC cover for income replacement if they are injured.
What is the most tax-efficient way to pay myself?
A combination of a reasonable market salary (reducing company tax, establishing KiwiSaver record) and fully imputed dividends (drawing remaining profits efficiently) is typically optimal. The right ratio depends on your personal income from all sources and the company's imputation credit balance.
Practical Tips
- Review your salary level annually at year-end with your accountant, not at the start of the year — this lets you set the optimal split once you know the actual profit.
- Keep a shareholder current account ledger showing all drawings and salary declarations. A clearly maintained account demonstrates arm's length dealings to IRD if queried.
- If you have significant other income (rental, investments), calculate total personal income before setting your salary — a salary that pushes you into the 39% bracket may cost more than the company's 28% rate.
- Register for payday filing as an employer as soon as you start paying yourself a salary — it is compulsory and late filing attracts penalties.
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