Person Income Tax:
Personal income tax is structured around tax brackets, meaning the percentage of tax you pay depends on where each portion (the bracket) of your income falls. The first tax bracket starts at a rate of 18% and as your income increases you move through additional, higher tax brackets ranging from 26% to 45%.
For example, if you earn R360,000 annually (or R30,000 monthly), the first R237,000 is taxed at 18%. The remaining income from R237,001 to R360,000 is taxed at 26%. To calculate your total tax liability you apply these rates to the portion of your income falling into each bracket, add them together and then reduce it by any tax rebates you qualify for.
Company Tax:
While many believe company income tax is lower because it is only 27%, this is not true as there is also dividend withholding tax to consider if you are to receive this money.
Dividend Withholding Tax is an additional tax that needs to be paid before the profits of your company can be paid out and land in your hands. After both income tax and dividend tax, you will have paid an effective tax of 41.6% to get the money in your hands.
Trust Tax:
Trusts are taxed at a flat rate of 45%. However, trusts can distribute profits to beneficiaries, who then pay tax at their personal income rates.
Effective Tax Rate:
When considering tax structuring between personal and business income, it's important to look at your effective tax rate to arrive at the right decision. Just merely looking at the tax percentage could result in you paying more tax than you need to!
For instance, if you earn a salary of R924,000, you’ll pay 27% in personal income tax despite some of this income being tax in the 41% tax bracket . If the same amount is left in your business i.e. your business makes a profit of R924 000, it will also be taxed at 27%. BUT as a shareholder, if you want this money out of your business you will need to receive a dividend which means a further 20% of tax is paid and results in you paying 41.6% in total tax.
Ultimately, the decision of whether to leave money in your company or take it as salary depends on your specific tax situation. For salaries below R924,000, it might not make sense to leave money in the company.
If you're unsure about how to structure your tax situation, feel free to reach out to My Finance Partner for guidance.
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