Sole Trader vs Company in NZ: Which Structure Pays Less Tax?

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:

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 $78,100 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?

Worked example: $120,000 as a sole trader (2026-27 tax year; PAYE brackets are frozen and identical for 2025-26)

Personal income tax on $120,000, using the brackets above:

Add the ACC earner’s levy — 1.75% for 2026-27, capped at $156,641 of earnings (so the full $120,000 is levied, since it’s under the cap): $120,000 × 1.75% = $2,100.00.

Total tax and ACC on $120,000 as a sole trader: $29,477.50 + $2,100.00 = $31,577.50 — an effective (average) rate of 26.3%.

Now compare a company earning the same $120,000 that retains all of it and pays no salary: company tax is a flat 28% = $33,600.00 — actually more than the sole trader pays, because the sole trader’s blended average rate (26.3%) is still below the flat 28% company rate at this income level. This is why the company rate advantage only shows up when you compare it against your marginal rate on the slice of income you’re choosing to retain — not your average rate on the whole amount — and only for profit that’s genuinely left in the company, not drawn out. The worked example below (partial retention on $150,000) shows how this plays out in practice.

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 and retains $50,000 in the company (2026-27 tax year)

Sole trader — full $150,000 taxed personally:

• Income tax: $15,600×10.5% + $37,900×17.5% + $24,600×30% + $71,900×33% = $1,638.00 + $6,632.50 + $7,380.00 + $23,727.00 = $39,377.50
• ACC earner’s levy (1.75%, capped at $156,641 — $150,000 is under the cap): $150,000 × 1.75% = $2,625.00
• Total: $42,002.50

Company — $100,000 salary to owner, $50,000 retained at 28%:

• Income tax on the $100,000 salary: $1,638.00 + $6,632.50 + $7,380.00 + ($21,900×33% = $7,227.00) = $22,877.50
• ACC earner’s levy on the $100,000 salary only (retained profit isn’t salary, so it isn’t levied): $100,000 × 1.75% = $1,750.00
• Company tax on the retained $50,000: $50,000 × 28% = $14,000.00
• Total: $22,877.50 + $1,750.00 + $14,000.00 = $38,627.50

Of that $3,375 saving, $2,500 comes from the 33%-vs-28% income tax gap on the retained $50,000, and the remaining $875 comes from ACC earner’s levy not applying to profit that stays in the company rather than being paid out as salary — ACC levies earned income, not retained business profit ($50,000 × 1.75% = $875).

The $3,375 saving exists only while the $50,000 remains in the company. When eventually distributed as a dividend, imputation credits reduce personal tax further, but they don’t eliminate it — see below.

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 return fee ($57.20/year incl GST, including the FMA and XRB levies)
• 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 $78,100–$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 $78,100 (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 $78,100–$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.

Sources

• Company income tax — IRD
• Sole trader tax — IRD
• Look-through companies — IRD
• ACC levy rates — ACC