For most South African company owners a blend wins. A salary is deductible in the company, uses your personal rebates and lower tax brackets, and unlocks retirement fund deductions. Dividends carry no PAYE but cost 41.6% once company tax and dividends tax are combined. The usual answer is to draw a salary up to roughly the point where your personal marginal rate reaches 31%, then take the balance as dividends.
The wrong answer — and by far the most common one in practice — is neither. It is drawing money irregularly as "drawings", which is not a salary, is not a dividend, and creates a loan account that can trigger a deemed dividend under section 64E.
TL;DR
Salary: deductible for the company, taxed in your hands at personal rates, attracts PAYE and UIF.
Dividends: not deductible, paid from after-tax profit, plus 20% dividends tax — 41.6% combined.
Blend is usually optimal: salary into the lower brackets, dividends above.
Salary unlocks the retirement fund deduction, capped at R430,000 for 2026/27.
SBC status changes the maths considerably.
Drawings are neither. They create a loan account with real tax consequences.
The two routes, compared
| Salary | Dividend | |
|---|---|---|
| Deductible in the company? | Yes | No — paid from after-tax profit |
| Tax in your hands | Personal rates, 18% to 45% | 20% dividends tax, withheld |
| PAYE? | Yes | No |
| UIF? | Yes, up to the R17,712 cap | No |
| Uses your rebates and lower brackets? | Yes | No |
| Allows retirement fund deduction? | Yes | No |
| Counts as income for a home loan? | Yes | Harder to evidence |
| Requires distributable reserves? | No | Yes |
| Combined effective rate | 18% – 45% | 41.6% |
Where 41.6% comes from
| Amount | |
|---|---|
| Company profit | R100,000 |
| Company tax at 27% | (R27,000) |
| Distributable | R73,000 |
| Dividends tax at 20% | (R14,600) |
| In your hand | R58,400 |
| Total tax | R41,600 = 41.6% |
That 41.6% is the number to beat. Any salary you can draw at a personal marginal rate below 41.6% is cheaper than taking the same money as a dividend.
Looking at the 2026/27 brackets, that means salary is more efficient right up to the 41% bracket, which starts at R887,001 of taxable income.
The 2026/27 numbers you need
Personal income tax brackets
| Taxable income | Rate |
|---|---|
| R0 – R245,100 | 18% |
| R245,101 – R383,100 | R44,118 + 26% |
| R383,101 – R530,200 | R79,998 + 31% |
| R530,201 – R695,800 | R125,599 + 36% |
| R695,801 – R887,000 | R185,215 + 39% |
| R887,001 – R1,878,600 | R259,783 + 41% |
| R1,878,601 + | R666,339 + 45% |
Primary rebate: R17,820 · Tax threshold under 65: R99,000 Company tax: 27% · Dividends tax: 20% · Combined: 41.6% Retirement deduction: 27.5% of the greater of remuneration or taxable income, capped at R430,000
Worked example 1: R600,000 of profit before owner's pay
Option A — all dividends
| Amount | |
|---|---|
| Profit | R600,000 |
| Company tax at 27% | (R162,000) |
| Dividend declared | R438,000 |
| Dividends tax at 20% | (R87,600) |
| In hand | R350,400 |
Option B — all salary
| Amount | |
|---|---|
| Salary | R600,000 |
| Company taxable income | R0 |
| Personal tax on R600,000: R125,599 + 36% × R69,800 | R150,727 |
| Less primary rebate | (R17,820) |
| Net personal tax | (R132,907) |
| UIF (capped) | (R2,125) |
| In hand | R464,968 |
Option C — salary R400,000, balance as dividend
| Amount | |
|---|---|
| Salary | R400,000 |
| Personal tax: R79,998 + 31% × R16,900 = R85,237, less rebate R17,820 | (R67,417) |
| UIF | (R2,125) |
| Net from salary | R330,458 |
| Company profit after salary | R200,000 |
| Company tax at 27% | (R54,000) |
| Dividend | R146,000 |
| Dividends tax at 20% | (R29,200) |
| Net from dividend | R116,800 |
| Total in hand | R447,258 |
At this profit level, all salary wins — by roughly R114,568 over all dividends. Your marginal rate never exceeds 36%, which is comfortably below the 41.6% combined dividend cost.
Worked example 2: R1,600,000 of profit
Option A — all salary
Personal tax on R1,600,000: R259,783 + 41% × R713,000 = R552,113 Less rebate R17,820 = R534,293 In hand: R1,600,000 − R534,293 − R2,125 UIF = R1,063,582
Option B — salary R900,000, balance as dividend
| Amount | |
|---|---|
| Salary | R900,000 |
| Personal tax: R259,783 + 41% × R13,000 = R265,113, less rebate | (R247,293) |
| UIF | (R2,125) |
| Net from salary | R650,582 |
| Company profit after salary | R700,000 |
| Company tax at 27% | (R189,000) |
| Dividend | R511,000 |
| Dividends tax at 20% | (R102,200) |
| Net from dividend | R408,800 |
| Total in hand | R1,059,382 |
Almost identical — the two options are within R4,200 of each other, because you are drawing salary at 41% against a 41.6% dividend cost. At this level the tax answer is a coin flip, and the decision should turn on the non-tax factors below.
Worked example 3: an SBC changes everything
If your company qualifies as a Small Business Corporation, the first R550,000 of company profit is taxed at 0%, 7% and 21% — dramatically cheaper than 27%.
Profit R500,000, SBC, all dividends:
| Amount | |
|---|---|
| Profit | R500,000 |
| SBC tax: R18,620 + 21% × R135,000 | (R46,970) |
| Dividend | R453,030 |
| Dividends tax at 20% | (R90,606) |
| In hand | R362,424 |
| Combined effective rate | 27.5% |
Profit R500,000, all salary:
Personal tax: R79,998 + 31% × R116,900 = R116,237, less rebate = R98,417 In hand: R500,000 − R98,417 − R2,125 = R399,458
Salary still wins, but the gap narrows sharply. For an SBC, the combined dividend rate falls to around 27.5% at this profit level rather than 41.6% — which makes dividends competitive far earlier. If you qualify as an SBC, model both.
The non-tax factors that often decide it
Retirement funding. Contributions are deductible at 27.5% of the greater of remuneration or taxable income, capped at R430,000 for 2026/27 — up from R350,000, the first adjustment since 2016. Dividends do not count as remuneration for this purpose. An owner taking only dividends may find their deductible contribution capacity severely limited.
Home loans and credit. Banks understand payslips. Proving income from dividends means financial statements, resolutions and a longer conversation. If a bond application is coming, a consistent salary makes life considerably easier.
Distributable reserves. You can only declare a dividend out of profits, and only where the company satisfies the solvency and liquidity test. A company with accumulated losses cannot pay a dividend regardless of this year's cash position. A salary has no such constraint.
Cash flow smoothness. Salary is monthly and predictable. Dividends are lumpy and require a formal declaration.
UIF. A salaried director contributes to UIF, capped at R177.12 a month. Small, but it is a benefit dividends do not carry.
Loan account cleanliness. Regular salary and properly declared dividends keep your loan account near zero. Ad hoc drawings do not.
The mistake that costs more than either option
Most small-company owners do neither properly. They transfer money when they need it and let the bookkeeper call it drawings.
Drawings are not a salary. No PAYE is deducted, no payslip is issued, and it does not appear on an IRP5.
Drawings are not a dividend. No dividend was declared, no DTR02 was filed, no dividends tax was paid.
What they actually are is a loan from the company to you — a debit balance on your shareholder loan account. That carries two consequences:
Deemed dividend under section 64E. Where a company provides a loan or advance to a shareholder or connected person and it is not on arm's-length terms, the shortfall against the official rate of interest can be treated as a deemed dividend, attracting 20% dividends tax. The official rate for fringe benefits on low-interest loans is 7.75% per annum from 1 December 2025.
A growing balance you eventually have to clear — by declaring a dividend, paying a bonus, or repaying it in cash. Each of those has its own tax cost, and doing it at year-end under pressure rarely produces the cheapest answer.
The fix is not complicated. Decide on a salary, run it through payroll monthly, and declare dividends formally when you want to take more. Both are cheap to do properly and expensive to do by accident.
How to actually declare a dividend
Deciding to take a dividend is not the same as taking one. There is a process, and skipping it is how a "dividend" becomes a loan account.
1. Confirm there are distributable profits. Dividends come out of profits, not out of cash. Check retained earnings, not the bank balance.
2. Apply the solvency and liquidity test. The Companies Act requires the board to be satisfied that, immediately after the distribution, the company's assets will fairly exceed its liabilities and it will be able to pay its debts as they fall due for the next 12 months. This is a real test, and directors who ignore it carry personal exposure.
3. Pass a board resolution. Written, dated, and specifying the amount and the date of declaration. This is the document that makes it a dividend rather than a withdrawal.
4. Withhold the dividends tax. The company withholds 20% and pays it over to SARS. The shareholder receives 80%.
5. Submit the DTR01 and DTR02. Dividends tax is declared and paid to SARS by the last day of the month following the month in which the dividend was paid. Missing this attracts penalties and interest.
6. Record it properly. The dividend, the withholding and the payment should all appear in the accounting records, and the resolution should be filed with your company records.
The whole process takes an hour. Doing it badly — transferring the money and calling it a dividend at year-end — is what creates the loan account problem this article warns about.
Timing: the decision has a deadline
Both routes have timing consequences that are easy to miss.
Salary must be run through payroll in the month it relates to — which means the company must be registered for PAYE. You cannot decide in February to have paid yourself a salary for the preceding eleven months. Backdating payroll creates late EMP201s, penalties and interest.
Retirement contributions must be made before your personal year-end — 28 February — to be deductible in that year. Contributions above the 27.5% / R430,000 limit carry forward rather than being lost, but the timing rule is firm.
Dividends can be declared at any time, provided the solvency and liquidity test is met, which gives them more flexibility than salary.
Practical consequence: the salary decision has to be made at the start of the year and executed monthly. The dividend decision can be made once you know how the year actually went. That asymmetry is a real argument for setting a conservative base salary and topping up with dividends, rather than trying to guess the optimal salary in March.
Three situations that change the answer entirely
You have other income. Rental income, interest, a second job or a spouse's business all push you up the brackets. If your other income already puts you in the 41% bracket, additional salary is taxed at 41% or 45% and dividends become the clearly cheaper route much earlier.
The company has an assessed loss. Where the company has losses brought forward, its effective tax rate on this year's profit may be low or nil — and remember the 80% restriction means only 80% of taxable income can be offset, or R1 million if higher. A salary that creates or increases a loss you cannot fully use is poor planning.
You are approaching a sale or a bond application. A consistent salary history for two to three years makes a bond application straightforward and demonstrates a sustainable owner's remuneration to a buyer. Stripping salary to minimise tax in the year before you sell can reduce the price a buyer is willing to pay, because they will normalise the owner's remuneration back in when valuing the business.
A practical rule of thumb
For a company not qualifying as an SBC:
Draw a salary up to around R530,000 to R700,000, where your marginal rate is 31% to 36% — clearly better than the 41.6% dividend cost.
Make your retirement contribution off that salary, up to 27.5% capped at R430,000.
Take the balance as dividends once salary pushes you into the 41% bracket.
Keep the loan account at or near zero.
For a company qualifying as an SBC, model both properly — the cheap early company tax bands change the answer, sometimes substantially in favour of dividends.
Whatever you choose, the salary must be commercially reasonable for the work you do. An artificially low salary paired with large dividends, in a company where you are the only person generating income, is the kind of arrangement that attracts questions.
Frequently asked questions
Is it better to pay myself a salary or dividends in South Africa? Usually a blend. Salary is deductible in the company and taxed at your personal rates, which are below the 41.6% combined cost of dividends until you reach the 41% bracket at R887,001. Draw salary into the lower brackets and take the balance as dividends.
What is the combined tax rate on dividends from my own company? 41.6% for a standard company — 27% company tax, then 20% dividends tax on what remains. For a qualifying Small Business Corporation the combined rate is lower, because the first R550,000 of company profit is taxed at 0%, 7% and 21%.
Can I just take drawings instead of a salary or dividend? You can transfer the money, but it is neither a salary nor a dividend. It creates a debit loan account, which can trigger a deemed dividend under section 64E and 20% dividends tax where the loan is not on arm's-length terms. The official rate on low-interest loans is 7.75% per annum from 1 December 2025.
Do I have to pay myself a salary from my company? There is no legal requirement to draw a salary, but if you do draw one, the company must register for PAYE and run it through payroll. Taking only dividends is permissible, but it limits your retirement fund deduction and makes proving income to lenders harder.
How much can I contribute to a retirement annuity from my company salary? Contributions are deductible at 27.5% of the greater of remuneration or taxable income, capped at R430,000 a year for 2026/27, up from R350,000. Dividends do not count as remuneration for this purpose.
Does dividends tax apply if I am the only shareholder? Yes. Dividends tax at 20% applies regardless of how many shareholders there are, and is withheld and paid over by the company.
Can my company pay a dividend if it has accumulated losses? Generally no. Dividends must be paid out of profits, and the company must satisfy the solvency and liquidity test under the Companies Act. A company with accumulated losses may be unable to declare a dividend even where it has cash available.
Does an SBC change the salary versus dividends answer? Considerably. Because the first R550,000 of taxable income is taxed at 0%, 7% and 21% rather than 27%, the combined cost of dividends falls well below 41.6% — making dividends competitive at much lower profit levels. Model both rather than applying the standard rule of thumb.
Model it on your actual numbers
The examples above use round figures and ignore medical credits, retirement contributions, other income and the timing of distributions — all of which move the answer. The right split for you depends on your profit level, whether you qualify as an SBC, what other income you have, and what you need the money for.
Smartbook models this for clients annually, before year-end rather than after it, and handles both sides properly — payroll for the salary, and the dividend declaration and DTR02 for the distribution.
Last reviewed: 26 July 2026. Written by the Smartbook team — SAIPA and SAICA accredited, SARS registered tax practitioners. Worked examples use 2026/27 rates, ignore medical credits and retirement contributions unless stated, and are illustrative only. Remuneration structuring is fact-specific — take advice before implementing.
Primary sources: SARS — Budget 2026 Frequently Asked Questions · SARS — Comprehensive Guide to Dividends Tax · SARS — Tax Rates · SARS — Small Businesses Taxpayers