Once you trade through a company, your money and the company's money are two different things. You can't help yourself to the bank balance — legally the company is a separate person, and the cash belongs to the company. To move money from the company to you, you generally take a salary, a dividend, or a mix of the two, and each is taxed on a different basis. The balance between them changes your total tax bill. Taking everything as salary or everything as dividends can cost more tax, and mixing personal and company spending can draw questions from SARS.
How salary is taxed
A salary (or director's remuneration) is a cost to the company. It reduces the company's taxable profit, so every rand of salary is a rand the company doesn't pay 27% company tax on. The salary is then taxed in your hands through PAYE on the personal sliding scale, which climbs as you earn more, and the company has to run payroll — deducting PAYE and UIF each month and paying it over on an EMP201 by the 7th. So salary is efficient at lower levels and gradually less efficient as your personal marginal rate rises into the higher brackets.
- Reduces company profit, saving 27% company tax on every rand paid
- Taxed on you via PAYE at your marginal rate on the sliding scale
- Counts as remuneration for UIF, and for SDL once payroll tops R500,000 a year
- Builds a documented income record — which banks want for bonds, vehicle finance and credit
How dividends are taxed
A dividend is a distribution of the company's profit to its shareholders. It is not deductible. It is paid out of profit the company has already been taxed on. So a dividend is taxed twice: first the company pays 27% company tax on the profit, then dividends tax of 20% is withheld when the dividend is paid to you as an individual. The company withholds that 20% and pays it to SARS, so you receive the dividend net.
One important carve-out: dividends paid between SA-resident companies are exempt from dividends tax, which matters if you run a holding-company structure. But for an ordinary owner drawing profit into their own pocket, the 20% applies.
The double-tax maths
The figure to know is the combined effective rate on profit taken as a dividend.
What R100 of profit becomes as a dividend
The company earns R100 of profit. It pays 27% company tax, leaving R73. It then distributes that R73 as a dividend, with 20% dividends tax withheld — R14.60. You receive R58.40 in your pocket. The combined effective rate on that R100 of profit is about 41.6%. An owner who has not yet used up their lower personal tax brackets can pay less by taking part of their income as salary.
Combining salary and dividends
A common structure is a reasonable, market-related salary, enough to use up the lower personal tax brackets, cover living costs and keep a clean income record, with further profit taken as dividends. The reasons:
- A salary uses up your lower personal brackets and is deductible to the company at 27%
- Dividends let you draw surplus profit without dragging your personal income into the top marginal bands
- Lenders assessing bond, vehicle and credit applications can see a salary on your payslips and IRP5
- The right split shifts year to year as the company's profit and your personal circumstances move
A simple mix in practice
Your company makes R900,000 profit. You draw a R400,000 salary — deductible to the company, taxed on you at moderate personal rates, and enough to live on and show income to a bank. That leaves R500,000 of company profit taxed at company rates, from which you declare dividends as you need them for larger costs. You've used your lower personal brackets and kept the remainder inside the company until you need it. The 20% dividends tax is due only when the dividend is paid.
Where the crossover sits
As a rule of thumb, keep taking salary while your personal marginal rate on the next rand is below the combined company-plus-dividends rate of roughly 41.6%, and switch to dividends once your salary would be taxed above that. That crossover point depends on the personal tax tables for the year — SARS adjusts brackets annually — so it moves, and it interacts with things like retirement contributions and medical credits. Model the crossover with your own figures for the year.
The other ways money leaves the company
Salary and dividends are the two main routes, but value moves from the company to you in other ways too, each with its own rules.
Loan accounts
If you've put your own money into the company, it can pay you back tax-free, because that is a loan repayment and is not income. If the company lends money to you, that can have tax consequences, and the loan needs a written record and agreed terms. Keep director's loan accounts documented and reconciled each year, because SARS can query them.
Business expenses
Costs the company incurs, and reimbursements for business expenses you paid personally, reduce company profit and aren't income to you. Each one needs a receipt or invoice. Personal spending run through the company can be disallowed in a SARS review and taxed.
Retirement contributions
Retirement fund contributions are deductible, and the deduction is linked to your salary level. Plan them together with your salary and dividend split.
Timing matters too
When you draw money also affects the tax. Your personal tax and the company's tax run on their own cycles, and a dividend declared just before or just after a year-end can land in a different tax year with a different result. A single big, irregular draw can push your personal income into a higher bracket in one year when spreading it over two would have been cheaper. Plan the timing before the year closes, because it cannot be changed afterwards.
Mistakes to avoid
- Taking a token R1,000 salary and everything as dividends. An unreasonably low salary paired with large dividends can attract SARS scrutiny, and it wrecks your income record for bonds and finance. Keep the salary defensible and market-related.
- Treating the company account as a personal wallet. Every rand out should be identifiable as salary, a dividend, a loan repayment or a business expense. Anything else is treated as a director's loan at year-end.
- Forgetting the dividend admin. A dividend needs more than a bank transfer. The company must declare it with a resolution and account for the 20% dividends tax to SARS.
- Setting the split once and never revisiting it. The efficient mix changes as tax tables, profit and your circumstances change. Review it each year.
- Ignoring UIF and payroll on the salary side. Paying yourself a salary makes you an employer with monthly EMP201 obligations.
Don't forget the admin
Whichever route you take, both carry obligations. Salary means registering as an employer and running payroll — monthly EMP201 submissions, PAYE and UIF, and the twice-yearly EMP501 reconciliation. Dividends mean the company must declare the dividend by resolution and pay over the 20% dividends tax. Late or missing submissions lead to penalties.
Both routes feed your provisional tax
Your split also affects provisional tax. A salary is taxed through PAYE as you go, so it's largely settled each month. But dividends and company profits aren't — the company is a provisional taxpayer, and if you're an individual drawing significant non-salary income you may be one too. That means the way you split salary and dividends feeds straight into your provisional tax estimates twice a year. Take a big dividend late in the year and you can create a provisional shortfall — and an under-estimation penalty — if the estimate wasn't adjusted for it. Plan your salary and dividend split and your provisional tax together.
A large dividend near year-end can lead to a provisional under-estimation penalty. If you plan to draw a large one, tell whoever does your provisional estimate before you do it.
Summary
Salary is deductible but taxed on you personally; dividends come from already-taxed profit and carry a further 20%, for a combined effective rate near 41.6%. A blend of the two, set from your figures, can give a lower combined tax than either route on its own, and the right blend moves as profit and personal circumstances change. Talk to us and we'll run your figures, set the crossover point and put a defensible salary-and-dividend mix in place, then review it each year.