For an owner-manager, salary versus dividends after company and dividends tax.
Better route
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Net as salary
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Net as dividend
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Your breakdown
Updates live as you type| Route | Tax taken | Net to owner |
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Two doors out of the same company
If you own the company you work in, the profit it makes can reach your pocket through one of two doors. You can pay yourself a salary, which the company deducts as an expense, and then you pay income tax on it personally. Or you can leave the profit in the company, let it pay company tax, and distribute what is left as a dividend, which then carries dividends tax. This tool lines up the two doors and tells you which leaves more cash in your hand for a given slice of pre-tax profit. It is aimed squarely at owner-managers of private companies who genuinely have the choice, not at salaried employees.
The reason the answer is not obvious is that the two routes are taxed on completely different logic. A salary runs through the progressive individual scale, where the first chunk is taxed gently and rebates knock money off the bill. A dividend runs through two flat charges stacked on top of each other. Understanding that difference is the whole game.
The stacked bite on the dividend route
When profit comes out as a dividend, it is taxed twice. First the company pays income tax on the profit at a flat rate, the figure this calculator applies being 27 percent. Then, when the after-tax profit is distributed, dividends tax of 20 percent applies to that distribution. Stacking the two means roughly 41.6 percent of the original profit is gone before it reaches you, because you keep 73 percent after company tax and then 80 percent of that after dividends tax, and 0.73 times 0.80 is about 0.584. Both rates are the ones this calculator applies and both should be confirmed with SARS, since they are exactly the sort of figures a budget can move.
The salary route avoids company tax entirely in this model, because a salary is deductible and is assumed to wipe the company taxable income down to zero. Instead the whole amount is taxed in your hands on the individual scale, with the primary rebate and the lower brackets working in your favour, less a small UIF contribution. At moderate profit levels that progressive treatment beats the flat 41.6 percent comfortably.
Splitting R800,000 of profit both ways
Take R800,000 of pre-tax profit and an owner under 65. Here is each door, using the rates this calculator applies.
The salary route leaves about R586,433 against R467,200 for the dividend, a difference of roughly R119,233 in favour of salary at this profit level. The bars below show how much of the R800,000 each door delivers to you.
What the comparison leaves out
This is a clean two-door comparison, not a full tax plan, and three things sit outside it. First, the model assumes the entire profit goes out one door or the other, whereas in practice a sensible owner often blends a modest salary with a dividend top-up. Second, a salary builds your retirement-fund contribution room and your UIF cover, while a pure dividend does not. Third, the gap narrows at very high profit, because the salary then climbs into the top marginal bracket and the flat dividend stack stops looking so bad by comparison. Run your own number, then talk the structure through with an accountant before you set your drawings, and verify the current rates with SARS.
Why does salary still win even though my marginal rate feels high?
Because the salary is taxed progressively from the bottom up, so only the top slice hits your highest bracket while earlier slices are taxed far more gently and the primary rebate reduces the bill. The dividend route applies its 27 percent and 20 percent flat to every rand, with no rebate, so at R800,000 the blended salary cost stays below the roughly 41.6 percent combined dividend bite.
Can I just pay myself a tiny salary and take the rest as dividends?
You can blend, and many owners do, but a salary that is unrealistically low for the work you do invites SARS scrutiny and weakens your retirement and disability planning. This tool shows the two pure extremes so you can see the spread; the practical answer usually sits between them and depends on your other income, confirmed against current SARS rates.
Does the salary route really pay no company tax?
In this model, yes, because a salary is a deductible expense that is assumed to reduce the company taxable income to zero, so the profit is taxed only in your hands. In reality a company often has other income or limits on how much it can justify as salary, so treat the zero-company-tax assumption as the simplification it is.