Business owners are often clueless as to the best way to pay themselves from their company, but as with all things in life, the answer is not cut and dry – classic! Most business owners think that taking drawings from the company is the same as receiving a PAYE salary, but that’s not entirely the case. So, what are the key differences between PAYE wages, shareholder salaries, and drawings? We’ve jotted down our comments below to give you a fair idea of what the best shareholder payment option is for your business.
With a PAYE salary, shareholders are essentially a company employee receiving a net wage into their bank account, with PAYE deducted and paid to Inland Revenue at source. Paying yourself a PAYE salary is often thought of as being easier to manage regarding business forecasting, and stability, however there are some key things to consider before deciding if PAYE is right for you.
If you’re an eager beaver when it comes to paying tax, then it’s likely that a PAYE Salary would suit you. Compared to provisional tax payments required with a shareholder salary (assuming your tax payable is over the provisional tax threshold of $5,000), PAYE payments are deducted prior to you receiving the wages in your bank account. A good chunk of shareholders prefer a PAYE salary to reduce the admin of having to manually pay tax to Inland Revenue during the year, plus you get the bonus of automatic Kiwisaver and student loan deductions.
Some shareholders also feel that receiving a structured PAYE Salary is better when managing your personal expenditure (rather than taking sporadic drawings). It’s also common for shareholders to take regular drawings as if they are receiving a PAYE salary, all while putting estimated tax aside on this amount. In saying the above, its good to keep in mind that lenders can often be slightly more wary of people who receive shareholder salaries, as the amount received is based on company profit (subject to vary year on year).
Shareholder salaries are a non-cash book entry prepared in your year-end financials by your accountant. Essentially, shareholder salaries are used to distribute company profit to shareholders at market value. As mentioned above, many small business owners take regular and consistent company drawings throughout the year to act as a PAYE Salary (often the amount of drawings to be taken is calculated based on last year’s company profit), and then the shareholder salary adjustment is used to offset drawings in the current account. However, you need to be disciplined not to fall into the trap of living on your gross income instead of your net, and remember to put funds aside for provisional tax payments and KiwiSaver.
Being aware of the company annual profit is key in deciding how much drawings to take throughout the year, as if you end up taking too much, your shareholder current account may end up in an overdrawn position – meaning there will be interest charged by the company. If all of this is making you dizzy, give your Outside go-to a bell and they’ll talk you through it.
Still undecided which method is best to get paid from your business? Who knew it can be complicated to own a company and enjoy your own profits! Give us a ring and we’ll get you sorted.
Your Outside Team
Address: Level 2, 182 Vivian Street,
Te Aro, Wellington 6011, New Zealand
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