How to Pay Yourself as a NZ Business Owner: Salary, Drawings, and Dividends Explained

One of the most common questions we get from NZ business owners is: how should I pay myself?

The answer depends on your business structure — and getting it wrong can mean paying more tax than you need to, or creating compliance problems with IRD.

If you operate as a sole trader, there's no legal separation between you and your business. You don't pay yourself a salary — you simply take money out of the business as drawings.

For tax purposes, your personal income and business income are the same thing. You pay income tax on your net profit (revenue minus expenses), regardless of how much you actually drew out of the business.

This simplicity is one of the advantages of the sole trader structure. The downside is that there's no tax benefit to leaving money in the business — it's all taxed at your personal rate.

If you operate through a company, you have more options — and more complexity.

You can pay yourself a salary as an employee of your company. The salary is subject to PAYE, just like any other employee's wages. The company deducts PAYE and pays it to IRD on your behalf.

The salary is a deductible expense for the company, which reduces the company's taxable income. Your personal income tax is paid through PAYE.

The advantage of a salary is that it's straightforward and creates a clear record of your personal income (useful for mortgage applications, for example). The disadvantage is that PAYE is deducted at source, so you need to manage your cash flow accordingly.

You can also take money out of the company as shareholder drawings. These are recorded in a shareholder current account — essentially a loan account between you and the company.

If your drawings exceed the amount you've put in or earned through salary and dividends, the current account goes into debit — meaning the company has effectively lent you money. IRD requires interest to be charged on debit current accounts at the prescribed rate. If interest isn't charged, IRD may treat the balance as a dividend.

Managing the current account carefully is important. An unmanaged debit current account can create unexpected tax liabilities.

Dividends are distributions of after-tax company profit to shareholders. The company pays tax on its profit at the 28% company rate, then distributes the remainder as dividends.

Dividends come with imputation credits — credits for the tax already paid by the company. If your personal tax rate is lower than 28%, you may receive a tax refund on dividend income. If your personal rate is higher, you'll pay additional tax.

The timing of dividends matters. Dividends need to be properly documented with a dividend resolution and paid in accordance with the Companies Act.

The optimal approach depends on:

• Your personal tax rate
• The company's profitability
• Your cash flow needs
• Whether you have other shareholders
• Your plans for the business

In many cases, a combination of salary and dividends is the most tax-efficient approach — but the right split depends on your specific situation.

At Eastmure & Associates, we help company owners structure their remuneration in the way that makes the most sense for their circumstances — and review it as the business grows and changes.

Book a free 30-minute call to talk through your remuneration structure.