Generally in business, the owner-operators receive remuneration in one of two ways, via a shareholder salary or a PAYE salary. But what’s the difference?

A shareholder salary is generally a “paper entry” completed at year-end with your annual financial statements and applies to those operating a company structure.  The salary is reflected in the market value of your time working in the business throughout the year.  Often this is paid via drawings during the year out of the Company bank account.

At year-end, your drawings are totaled as a debt owed by you to the Company which is reduced by the shareholder salary that you “haven’t been paid”.  Instead of paying your personal tax monthly with PAYE, this is completed via provisional tax three times a year with any wash up completed as terminal tax in April.

Deferring your tax this way assists with cash flow throughout the year but can make it harder to manage tax payments as you have to ensure you are setting aside cash for these payments to avoid penalties and interest charged by Inland Revenue for missed payments.

A PAYE salary is again the market value reflected in your time working in the business throughout the year.  The difference is that your tax is paid monthly and you are often not subject to provisional tax.  This is useful to those who wish to pay their individual tax as they go rather than reserve cash for lump sum provisional tax payments at a later date.

With a PAYE salary, you are effectively treated like any other employee, you receive a net cash payment into your personal bank account and the business pays your tax on your behalf.  This is a good way to manage your personal expenditure as this will not be going through the business bank account and to ensure that your individual taxation obligations are up to date.

There is no right or wrong way.  Speak to your advisor for what is best for your situation.