This paper presents optimal third harmonics in both permanent magnet (PM) shaping and current waveform to improve the output torque of five-phase surface-mounted PM (SPM) machines. The optimal value of third harmonic injected into the sinusoidal PM shape and current waveform for maximum torque improvement is analytically derived and validated by both finite element (FE) analyses and experiments. It is found that the optimal third harmonic is 1/6 of the fundamental one for both PM shape and current waveform. For the five-phase SPM machines having rotors without shaping, Sine shaping, or Sine shaping with third harmonic injected, the electromagnetic performance including the back EMF waveform, cogging torque, average torque, torque ripple, copper loss, iron loss, impact on power inverter, and demagnetization withstand capability are compared. It is demonstrated that, although the copper loss and iron loss increase due to additional third harmonic in the winding current and magnet shape, the average torque with optimal third harmonics injected in PM shaping and current waveform can be improved by >30% while the torque ripple and remains similar to that of the one with Sine shaping. In addition, this will reduce the dc bus voltage while maintaining the machine torque density. Furthermore, the machine with Sine and Sine+3rd rotors presents much better demagnetization withstand capability performance than conventional rotor.