How Much Should I Pay Myself?

⚖️ Drawings, shareholder salary and PAYE salary

New Zealand owners of a company have three routes for taking money out, and they are frequently confused with one another. They are taxed differently and they create different obligations.

Drawings

Drawings are simply cash taken out of the company during the year. On their own they are not income and they are not a deduction for the company: they are a movement against your shareholder current account. If you have money owing to you from the company, drawings reduce that balance. If you do not, drawings make your current account overdrawn, which means you owe the company money. An overdrawn current account can attract deemed interest and is one of the more common unpleasant surprises at year end.

Drawings are a cash mechanism, not a remuneration decision. The decision is what gets recorded at year end.

Shareholder salary

A shareholder salary is an amount your accountant allocates to you as a working shareholder, usually at year end when the result is known. The company claims a deduction; you declare the income in your own return and pay the tax yourself. No PAYE is deducted during the year, which is why this route pairs with provisional tax.

It is the most common arrangement for owner-operated New Zealand companies precisely because it is flexible: the figure can be set once the year's profit is known rather than committed to in advance.

PAYE salary

A PAYE salary treats you as an employee. Tax is deducted each pay run, KiwiSaver can apply, and the amount is fixed in advance rather than decided in hindsight. It is more administrative work and considerably more predictable, and it removes the year-end provisional tax problem because the tax has already been paid as you went.

Use our shareholder salary calculator to see the tax outcome of a given allocation, and our self-employed take-home calculator if you are a sole trader rather than a company, where the whole profit is your income regardless of what you withdraw.

💰 Provisional tax, ACC and the dividend question

Provisional tax follows a shareholder salary

Because no tax is deducted from a shareholder salary during the year, you pay it through provisional tax instalments. Once your residual income tax passes the threshold, you move into the provisional regime and begin paying in instalments through the year based on the previous year's result, with a wash-up at the end.

The trap is the first profitable year. You pay the previous year's tax and the current year's instalments in overlapping periods, which can mean funding close to two years of tax in one. Owners who set their pay without allowing for this are the ones who end up on an instalment arrangement with Inland Revenue, where use of money interest compounds daily. Our IRD instalment arrangement calculator shows what that costs once it happens.

ACC levies apply to what you take

ACC levies are charged on your earnings as a working shareholder, and they are a genuine cost of paying yourself that owners routinely forget when comparing options. The levy rates depend on your classification unit, which reflects the actual work you do rather than the industry description on your paperwork. If your classification is wrong you may be paying materially more than you need to, and it is worth checking once rather than never. Our self-employed ACC levy calculator works the figures.

Salary against dividends

A company can also distribute profit as a dividend. The company pays tax on its profit at the company rate, and when it distributes that profit it attaches imputation credits representing the tax already paid. You then declare the gross dividend and receive credit for the tax the company paid, topping up to your own marginal rate if that is higher.

The imputation system is designed so that profit is not taxed twice. Where your marginal rate matches the company rate closely, the choice between salary and dividend makes little difference to total tax. Where your marginal rate is much lower, taking a salary can be more efficient; where it is much higher, dividends defer some of the difference until distribution.

🔢 Setting the number, and a worked example

There are two figures to establish and then reconcile.

Figure one: what the role is worth

Ask what you would have to pay someone to do what you actually do, for the hours you actually do it. Be specific about the role rather than the title. An owner who spends two days a week quoting and three on the tools is doing two jobs, and the market rate is a blend of both.

Look at what similar roles advertise for, add employer costs of roughly eight to ten percent for KiwiSaver, ACC and ESCT, and adjust for the hours. A $110,000 role done at fifty-five hours a week is not a $110,000 role.

Figure two: what the business can sustain

Take your profit before your own pay, subtract what the business needs to retain for tax, for the working capital that growth consumes, and for a cash buffer. What is left is the ceiling.

When to review

Set the figure annually, at the same time as your accounts are finalised, and change it whenever the role changes materially: taking on staff, dropping a function, moving from doing the work to managing people who do it. The most common failure is not setting the number badly, it is setting it once in year one and never revisiting it while the business trebles in size around it.

Related guides and tools

• Can I afford to hire guide, for the next decision after your own pay is settled.
• Should I delegate or do it myself guide, for working out which of your hours are worth the most.
• How to price a job guide, for building your own wage into what you charge.
• Tools: shareholder salary calculator, salary versus dividend calculator, self-employed take-home calculator, SDE calculator, and business health check calculator.