Sole Trader vs Company in NZ: Which Structure Pays Less Tax?
Compare sole trader and company tax structures in New Zealand. See how personal income tax rates, the 28% company rate, shareholder salaries, and retained earnings affect your tax bill.
Published 22 March 2026
One of the biggest financial decisions for a self-employed New Zealander is whether to operate as a sole trader or incorporate a limited liability company (LLC). The tax implications are significant — but the right answer depends on your income level, how much profit you retain in the business, and how much compliance cost you’re willing to absorb.
Sole Trader: Simple but Capped
As a sole trader, your business income flows directly onto your personal tax return. You pay income tax at the standard personal rates:
| Income | Rate |
|---|---|
| $0–$14,000 | 10.5% |
| $14,001–$48,000 | 17.5% |
| $48,001–$70,000 | 30% |
| $70,001–$180,000 | 33% |
| Over $180,000 | 39% |
There is no company structure between you and the tax bill. All profit is taxed as your personal income in the year it’s earned, regardless of whether you actually spend it.
Company: The 28% Rate Advantage
A New Zealand company pays corporate income tax at a flat 28% on its net profit. For a sole trader earning $120,000 of business profit, the marginal rate on income above $70,000 is 33% — 5 percentage points higher than the company rate.
However, the key question is: do you actually leave money in the company, or do you take it all out as a salary?
Shareholder-Employee Salary
Most owner-operators of companies pay themselves a shareholder-employee salary. This salary is deductible for the company (reducing company profit and thus company tax), and the salary is taxed at personal rates in the owner’s hands — exactly the same as a sole trader.
The result: if you extract all profit as salary, your total tax bill is roughly the same as a sole trader. The company rate only creates a real saving when profit is retained inside the company.
Example: $150,000 business profit, owner takes $100,000 salary
| Sole trader | Company | |
|---|---|---|
| All profit taxed personally | Yes — at personal rates | No |
| Salary paid to owner | N/A | $100,000 at personal rates |
| Remaining profit in company | N/A | $50,000 taxed at 28% |
| Tax on retained $50,000 | $16,500 (at 33%) | $14,000 (at 28%) |
| Annual saving | — | $2,500 |
The $2,500 saving exists only while the $50,000 remains in the company. When eventually distributed as a dividend, imputation credits may reduce personal tax further — but that depends on the owner’s tax rate at the time.
Dividends and Imputation Credits
When a company pays a dividend to shareholders, it can attach imputation credits equal to the company tax already paid. For a shareholder with a marginal rate of 33%, receiving a dividend with full imputation credits at 28% means paying only the 5% top-up — not the full personal rate again.
This makes companies more attractive for owners who:
- Have multiple shareholders at different tax rates
- Want to spread income across family members (with care around attribution rules)
- Are building business value and planning a future sale
Compliance Costs Are Real
The company structure comes with ongoing costs:
- Annual Companies Office fee (~$44/year for online filing)
- Separate company tax return (IR4)
- Shareholder current account tracking
- Potentially separate GST and PAYE registrations
- Accountant fees — typically $500–$2,000 more per year than for a sole trader
These compliance costs can easily wipe out the tax saving at modest income levels. A rough guide: the company structure typically becomes financially worthwhile when taxable profit exceeds $70,000–$100,000 and you can retain meaningful amounts inside the company.
Look-Through Companies (LTCs)
A Look-Through Company (LTC) is a hybrid option: it has the legal structure of a company (limited liability, separate legal entity) but the income and losses “look through” to the shareholders and are taxed at personal rates. This can be useful for:
- Property investors wanting limited liability without double taxation
- Businesses expecting early losses they want to offset against other income
LTCs do not benefit from the 28% company rate — all income is taxed personally.
Which Is Right for You?
Sole trader is likely better if:
- Your annual profit is under $70,000 (marginal rate 30% or less — not far above the 28% company rate)
- You distribute all profit as salary anyway
- You want to minimise compliance costs and paperwork
- You’re just starting out and testing the business
Company is likely better if:
- Your profit exceeds $70,000–$100,000 and you can retain some inside the company
- You want limited liability protection
- You plan to bring in investors or co-owners
- You’re building a business with long-term sale value
Use our Self-Employment Tax Calculator to estimate your total tax as a sole trader, and consider speaking with an accountant before incorporating.