Pay Less, Keep More

Tax tips for business owners in SA

By Werner Pienaar CFP®

 

Smart tax planning can lead to significant savings and improved cash flow. Whether you're operating as a sole trader or through a registered company, knowing how different tax rates apply is crucial.

 

Understanding Tax Rates: Company vs Individual

• Company Tax: Private companies in South Africa are taxed at a flat rate of 27% on taxable income.

• Dividends Tax: When a company distributes profits to shareholders, a 20% dividends tax applies (unless the shareholder is exempt e.g. the shareholder is also a company).

• Individual Tax: Sole proprietors and individuals are taxed on a sliding scale, ranging from 18% to 45% depending on the level of taxable income.

Example: A company making R 1 million in profit pays R 270,000 in company tax, and if dividends are declared, an additional R 146,000 (20% of R 730,000) in dividends tax — resulting in an effective tax rate of 41.6%. In contrast, taxable earnings of more than R 1 817,001 is taxed at 45% for individual taxpayers.

 

Key Tax-Saving Strategies

1. Operate Through a Company Where Advantageous
   While running a business as an individual may seem simpler, incorporating a company can reduce your tax rate, especially if you reinvest profits rather than drawing them all as dividends.

2. Structure Salaries and Dividends Efficiently
   Business owners can draw a portion of income as a salary (taxed at individual rates) and the rest as dividends. This balance can optimise the total tax liability, especially when staying below higher tax brackets.

3. Claim All Allowable Deductions
   Whether you're an individual or a company, SARS allows deductions for business expenses like rent, salaries, equipment, travel, and more. Keep accurate records and ensure all legitimate expenses are accounted for.

4. Use Retirement Contributions to Reduce Taxable Income
   Contributions to pension funds, provident funds, and retirement annuities are tax-deductible up to 27.5% of income (capped at R350,000 annually), making them a powerful dual-purpose tool for saving tax and providing for retirement capital.

5. Leverage Small Business Tax Relief
   If your business qualifies as a Small Business Corporation (SBC), you may benefit from lower tax rates on the first portion of income. Requirements include turnover limits and ownership restrictions — consult a tax advisor to check your eligibility.

6. Loan Interest Implications:
   Be aware of deemed donations and interest deductibility rules under Section 7C of the Income Tax Act.

7. Stay Compliant and Avoid Penalties
   Late payments or incorrect filings can result in penalties and interest. Use accounting software or professional services to manage your tax calendar, especially for provisional tax obligations.

 

Read more about Ascor® Tax Services

 

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