PAYE SALARIES FOR SHAREHOLDER EMPLOYEES

The income tax legislation has recently been changed so as to enable the shareholder employees to take both a PAYE and non-PAYE salary. Previously this could only be done if the non-PAYE salary was at least 50% of the PAYE salary. With the change in legislation you can take both. However if you take regular amounts of salaries and wages for regular pay periods you will be locked into paying PAYE on them.

Any profits that the company makes can still be credited to you as a full time employee in the usual way. Whilst you will still have to pay provisional tax and income tax in relation to this amount, the amounts will be much more manageable and less daunting.

You should be aware that if you opt into the PAYE regime, you must continue with a PAYE salary for the life of your company. You cannot change your mind and be a full provisional taxpayer again. The legislation does not allow for you to flip flop between the methods. This does not mean that you have to continue with the same amount of salary. If the company is not performing as well as you would have liked, you can always reduce your salary accordingly.

You will still have to carefully estimate your income for the provisional tax purposes in the year you make the change to a PAYE salary. If you underpay the provisional tax, IRD will charge you use of money interest (UOMI).

If the company makes a loss as a result of your PAYE salary, you will not be able to reduce your income by the amount of the loss unless your company happens to be a Look Through Company (LTC). The loss will be trapped in the company until it can be set off against profits derived in future years.