If you own and run a company, you can take money out as a salary, as dividends, or both. Each is taxed differently, and the best mix depends on how much profit the company makes.
How a salary is taxed
A salary is an expense of the company, so it reduces the company's taxable profit and saves company tax at 27%. You pay PAYE on it at your personal rate, from 18% up to 45%, less the primary rebate of R17,820 a year. You and the company each pay 1% UIF (up to R177.12 a month each), and the company pays the 1% skills development levy if its payroll is more than R500,000 a year.
How a dividend is taxed
A dividend comes out of profit that has already been taxed at 27%. When it's paid, 20% dividends tax is withheld. So every R100 of profit becomes R73 after company tax, and R58.40 after dividends tax: about 41.6% in total.
A small salary nearly always helps
If you're under 65, the first R99,000 of salary a year carries no PAYE, because the rebate cancels the tax. Each rand of it still saves company tax. So taking at least that much as salary usually beats taking it all as dividends.
A worked example
A company makes R600,000 profit before paying its owner, at 27%:
| All dividends | R300,000 salary | All salary | |
|---|---|---|---|
| Company tax | R162,000.00 | R80,426.13 | R0.00 |
| Dividends tax | R87,600.00 | R43,489.69 | R0.00 |
| PAYE | R0.00 | R40,572.00 | R130,010.80 |
| UIF and SDL | R0.00 | R4,250.88 | R10,170.43 |
| Owner keeps | R350,400.00 | R431,261.30 | R459,818.77 |
At this level of profit, salary wins, because the owner's PAYE rate stays below 41.6%. At higher profits, the top PAYE rates of 41% and 45% overtake it, and a mix starts to win.
Other things to weigh
Salary counts as remuneration for retirement fund contributions and for some loans; dividends don't. Salary must be paid through payroll with PAYE returns. And the company must be able to pay what it declares. Try your own numbers in our salary or dividends calculator, then talk it over with your accountant.
Sources
- SARS: Companies, trusts and small business corporations: rates
- SARS: Interest and dividends
- SARS: Rates of tax for individuals
- SARS: Unemployment Insurance Fund
- SARS: Skills Development Levy
This is general information, not tax, legal or financial advice.