Shareholder salary vs dividends

Quick answer

A shareholder salary is a deductible expense to the company and is taxed in your hands at personal rates, often with no PAYE deducted, so it lands on your IR3 and can trigger provisional tax. A dividend is paid out of after-tax company profit and carries imputation credits for the 28% company tax already paid, with top-up tax to bring it to your personal rate.

Most owner-operators use a blend: a shareholder salary to absorb profit at sensible personal rates, and dividends for the rest. There is no single right answer, it shifts with your total income and cashflow each year.

The detail, in plain English

Shareholder salary. A company can allocate profit to a working shareholder as a salary. It reduces the company's taxable profit, so less 28% company tax, and is taxed to you personally. Because it often has no PAYE withheld during the year, it usually flows through your IR3 and can push you into provisional tax if your residual income tax climbs above $5,000.

Dividends. These come out of profit the company has already paid 28% tax on. To avoid taxing the same profit twice, a dividend carries imputation credits equal to that company tax. You then pay only the difference between 28% and your personal rate. For a 33% shareholder, that is roughly an extra 5% on the grossed-up amount; for a 39% shareholder, more.

The practical aim is to get profit out at the lowest overall rate while keeping enough in the company for what it actually needs, working capital, tax provisions, planned spending. A common pattern is to use a salary up to a point where personal rates are still reasonable, then let dividends handle the surplus and use up imputation credits efficiently so they are not stranded. There are also non-tax angles: a regular salary can support lending applications and KiwiSaver in a way that lumpy dividends do not.

A simple example

A company makes $130,000 profit and has one working owner, Aroha. If it pays her the full $130,000 as a shareholder salary, the company has nil taxable profit and Aroha pays personal tax on $130,000, much of it at 30% and 33%.

Alternatively, the company retains part of the profit, pays 28% on it, and distributes the rest as an imputed dividend. The best split depends on whether Aroha needs all the cash now and exactly where the personal bands fall. Modelled properly, the blended approach usually leaves a little more in her pocket and puts the imputation credits to work rather than wasting them. The next year, if profit changes, the ideal mix changes too, which is why it is a yearly conversation.

Common mistakes to avoid

• Paying yourself nothing all year, then a lump sum. A large unexpected shareholder salary can create a provisional-tax and use-of-money-interest surprise.
• Declaring dividends with no imputation credits available. If the company has not paid enough tax, the dividend is taxed harder, sometimes much harder.
• Treating drawings as tax-free. Money taken from the company has to be classified as salary, dividend or a loan; overdrawn shareholder accounts carry their own tax consequences.
• Forgetting the whole-of-year view. The best mix depends on your total personal income, so it is decided at year-end, not set once and forgotten.
• Ignoring ACC and KiwiSaver effects. How you pay yourself can change ACC levies and KiwiSaver outcomes, not just income tax.

Where this fits in your return

Both salary and dividends land on your personal IR3, while the company reports the salary deduction, the dividend and the imputation credits in its IR4 and imputation credit account. Because neither usually has full tax withheld at source, this is a classic provisional tax trigger. The company and personal returns have to agree, which is exactly why coordinating both sides matters.

How Fernway can help

We work out the salary-and-dividend mix that suits your income and cashflow, keep your imputation account healthy so dividends can be fully credited, and line up the company IR4 with your personal IR3 so nothing falls between the two. We also flag the provisional-tax effect before it becomes a surprise. See imputation credits and company & trust accounts for the surrounding detail.

This is general information only, current at the time of writing, and not personalised tax advice. Tax rules change and your circumstances may differ, so confirm your position with us or check ird.govt.nz before you act on it.

In plain English: pay yourself with a blend of salary and imputed dividends, tuned to your total income each year, rather than defaulting to all of one or the other.