Shareholder Salary vs Dividend: Which Is Better for NZ Company Owners?

If you own and work in a company in New Zealand, one of the most important financial decisions you make each year is how to pay yourself. The two main options are a shareholder salary and dividends — and the right answer depends on your personal tax rate, your ACC situation, your KiwiSaver goals, and what you want to do with retained earnings.

Here is a clear breakdown of both options.

A shareholder salary is a salary paid to a shareholder who also works in the company. It is treated as an employment income for the shareholder and a deductible expense for the company.

Key features:

• Deductible to the company — reduces company taxable income
• Taxed at the shareholder's personal income tax rate (10.5% to 39%)
• Subject to PAYE (Pay As You Earn) — withheld and paid to IRD each pay period
• Counts as earnings for ACC levy purposes
• Counts as income for KiwiSaver contributions

A dividend is a distribution of after-tax company profits to shareholders. It is paid from retained earnings — money the company has already paid 28% company tax on.

Key features:

• Not deductible to the company — paid from after-tax profit
• Comes with imputation credits (representing the company tax already paid)
• Taxed at the shareholder's personal rate, but imputation credits offset the tax owed
• Not subject to PAYE
• Does not count as earnings for ACC
• Does not count as income for KiwiSaver

The total tax paid depends on the shareholder's personal tax rate relative to the 28% company rate.

If your personal income tax rate is lower than 28%, you pay less tax overall by taking a salary rather than leaving money in the company.

Example: You earn $50,000 from the company. Your personal marginal rate on that income is 17.5% (the 33% rate only kicks in above $70,000). If you take a salary, the company gets a deduction and you pay 17.5% — total tax is 17.5%. If you leave it in the company, it is taxed at 28%.

In this case, salary wins.

If your personal income tax rate is higher than 28%, retaining profits in the company and paying dividends later can be more efficient.

Example: You already earn $120,000 from other sources. Additional income is taxed at 33%. If you take a salary, you pay 33%. If you retain the profit in the company at 28% and take a dividend later (with imputation credits), the effective rate is still 33% — but you have deferred the extra 5% until you actually take the dividend.

This deferral can be valuable for cash flow and investment.

New Zealand's imputation system prevents double taxation. When a company pays tax at 28% and then pays a dividend, it attaches imputation credits to the dividend. The shareholder uses those credits to offset their personal tax liability.

Example: Company earns $100, pays $28 tax, has $72 to distribute. It pays a $72 dividend with $28 of imputation credits attached. If the shareholder's personal rate is 33%, they owe $33 on $100 of gross income — but they already have $28 of credits, so they only pay an additional $5.

If the shareholder's personal rate is 28% or below, the imputation credits fully cover their tax — no additional tax to pay on the dividend.

This is where the decision gets more nuanced for many business owners.

Shareholder salary counts as earnings for ACC purposes. ACC levies are charged on earnings up to a maximum ($139,892 for the 2024/25 year). The earners' levy is currently $1.60 per $100 of earnings.

Dividends are not subject to ACC levies at all.

For some business owners — particularly those who are already at the ACC maximum through other income, or who have a low risk of work-related injury — minimising the salary component to reduce ACC can make sense.

However, ACC cover also provides income protection if you are injured and cannot work. Taking a very low salary to minimise ACC means lower cover if something goes wrong.

Shareholder salary counts as income for KiwiSaver. If you want to make KiwiSaver contributions (and receive the member tax credit of up to $521/year), you need to have salary income.

Dividends do not count as KiwiSaver income. If you pay yourself entirely through dividends, you cannot make employee KiwiSaver contributions.

For business owners who want to build retirement savings through KiwiSaver, maintaining at least some salary income is important.

Some business owners pay themselves a modest salary — enough to cover personal living costs and maintain KiwiSaver contributions — and take the rest as dividends. This minimises PAYE administration and can reduce ACC levies while still maintaining KiwiSaver eligibility.

Others pay themselves a salary that reflects what they would earn doing the same work for someone else. This is particularly relevant if the company has other shareholders — IRD expects shareholder-employees to be paid at market rates for their work.

If the company is growing and reinvesting profits, it may make sense to take a modest salary and leave profits in the company. The company pays 28% tax on retained earnings, and dividends can be paid in future years when the shareholder's personal tax rate may be lower (e.g. after retirement).

Some business owners take money from the company as "drawings" — informal withdrawals that are not formally classified as salary or dividend. This is common but creates problems:

• Drawings are not deductible to the company
• If not properly documented, they may be treated as a loan from the company to the shareholder — which has its own tax implications (fringe benefit tax on low-interest loans)
• IRD scrutinises informal arrangements between companies and their shareholders

If you are taking drawings, it is worth formalising the arrangement with your accountant.

There is no universal answer to the salary vs dividend question. The right mix depends on:

• Your personal income tax rate
• Whether you have other income sources
• Your ACC situation and cover needs
• Your KiwiSaver goals
• Whether you want to retain earnings in the company
• The company's profit level and cash position

The optimal structure is worth reviewing every year — especially if your income level changes, if you take on other work, or if the company's profitability shifts significantly.

Getting the salary/dividend split wrong can mean paying thousands more in tax than necessary — or missing out on ACC cover or KiwiSaver contributions you actually want.

Talk to Eastmure & Associates about structuring your remuneration. We work with company owners across Christchurch and Canterbury to model the right approach for their specific situation.