Nicshe Business and Accounting Solutions presents an article on whether your firm should pay salaries or dividends
At Nicshe Business and Accounting Solutions we are often asked by our clients which makes more financial sense. Paying out a dividend or taking company profits via salaries. We have therefore decided to put this article together to highlight the pros and cons of both options. How to fund your business and how to take money out of your business are decisions you will be faced with as an entrepreneur and regardless of how successful your company is, there is a smart way to approach extracting funds and our team is ready to explain this to you.
You need to take not of the differences and how each one can impact your businesses tax obligation at the end of a financial year. Taking financial leadership around these two issues will set you apart from the entrepreneurial rat race. Here are some key insights that might help you make the right financial decisions for your business.
Taking money out of your company:
Your business is doing well and you have made a healthy profit! Congratulations!
Now the question begs: Do I pay the owners bigger salaries, or do I declare dividends?
The answer lies in the tax implications. Let us break it down for you with this example:
Dividends are currently taxed at 15% of after tax profit.
Here’s a simple example to illustrate the actual cost:
A company makes R100 profit. It pays R28 in companies’ tax (28% companies’ tax rate) and is left with R72 in after tax profit. On this, 15% dividends tax is charged (R72 x 15% = R10,80), leaving the owner with R61,20. The total tax paid on the R100 profit is R38,80, an effective tax rate of 38,8%.
The tax rate on salaries is based on the bracket that the receiver falls in. The only tax bracket in which salaries are taxed higher than the above combination of companies and dividends tax (38,8%), is the highest one of 40%. To reach this bracket, you would have to earn R673,101 annually (R56,092 per month).
It is cheaper for tax purposes to increase owner salaries up to a point where they earn R56,092 per month or more, than it is to pay out after tax profit as dividends.
We hope you have found these insights useful and if you have any questions relating to the running of your business please do not hesitate to contact us today!
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