Why am I paying tax on my company dividend, haven't I already paid?

Fairness: A Key Part of a Strong Tax System

A well-functioning tax system relies on fairness. One important way to maintain fairness is to ensure income is taxed in the hands of the person who actually benefits from it - usually the individual. Without this, people could use companies to shelter income and pay less tax.

Inland Revenue actively enforces the principle that company profits should ultimately be taxed in shareholders' hands.

Then why Company Tax Rates Are Lower?

In New Zealand, companies are taxed at a lower rate than the top personal income tax rates. This is intentional and helps support the economy by:

• Encouraging business growth – Lower tax encourage companies to reinvest profits into expanding, hiring, or improving their products and services.

• Attracting overseas investment – Multinational businesses often look for countries with competitive company tax rates when choosing where to invest.

However, since the ultimate benefit of company profits usually goes to shareholders, those profits eventually need to be taxed at the individual level to ensure fairness.

How New Zealand Avoids Double Taxation

To prevent company profits from being taxed twice (once when the company earns them, and again when they’re paid out to shareholders), New Zealand uses a system called imputation credits.

Here’s how it works:

• When a company pays tax on its profits, it earns imputation credits.

• These credits are passed on to shareholders when dividends are paid.

• Shareholders use these credits to reduce their personal tax on the dividend income.

This system means the income is taxed fairly, without being taxed twice.

Timing of Dividends and Tax Planning

While company profits can be held within the business, they are usually distributed to shareholders at some point. When that happens, shareholders may need to pay additional tax (known as a top-up) if their personal tax rate is higher than the company’s tax rate.

Because company directors decide when dividends are paid, this “top-up” tax becomes a matter of timing. Planning when to take dividends - especially in years when your income is higher or lower - can make a real difference to your overall tax position.

How we can help

At Cook and Partners, we help clients navigate these decisions. Whether you’re thinking about paying out profits, reinvesting in your business, or managing your overall tax position, we can guide you through the rules and help you make informed, tax-efficient choices.

Written by Simon Cook - Chartered Accountant