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March marks the start of a new financial year, and it is the perfect time for small business owners to reassess their tax approach and find ways to reduce their tax burden while remaining compliant with SARS regulations.
Keep the following in mind when planning to optimise your personal tax as a small business owner in South Africa.
Before making any financial decisions, it is essential to have a clear understanding of your tax liability. As a small business owner, you may need to file both personal income tax and business tax returns. Depending on how your business is structured, your tax responsibilities may include:
∙ Personal income tax (PAYE or provisional tax): If you earn an income from your business, you must declare it to SARS. Small business owners who are not on a payroll system must register for provisional tax, which means paying tax twice a year based on estimated earnings.
∙ Value-added tax (VAT): If your business’s annual turnover exceeds R1 million, you are required to register for VAT and submit VAT returns.
∙ Dividends tax: If you pay yourself through dividends rather than a salary, a 20% dividends withholding tax applies.
How you pay yourself from your business can significantly impact your tax liability. The key is to balance salary and dividends in a tax-optimal manner:
∙ Salary: If you are the director of a company, you can pay yourself a salary and deduct it as a business expense. However, it is subject to PAYE tax and UIF deductions.
∙ Dividends: Instead of receiving a hefty salary that places you in a high tax bracket, consider drawing a portion of your earnings as dividends, which are taxed at a flat 20% (compared to personal tax rates that can go as high as 45%).
∙ Medical aid tax credits: Ensure you claim your Medical Scheme Fees Tax Credit, which reduces your tax payable based on the number of dependants covered.
If you have surplus funds, investing in a Tax-Free Savings Account (TFSA) allows you to earn interest, dividends, or capital gains without paying tax on them. The annual contribution limit is currently R36,000, with a lifetime cap of R500,000. This is a smart way to grow your personal wealth tax-free. The effective tax rate in a company that pays dividends, is 41.60%. Therefor salary should be capped at 41% tax rate, after which profits should be taken as dividends.
Unlike salaried employees with taxes deducted monthly through PAYE, small business owners not on a payroll must pay provisional tax twice a year (August and February). This helps prevent a large tax bill at year-end. To avoid penalties, ensure you:
∙ Submit accurate income estimates to SARS.
∙ Set aside funds for your tax payments throughout the year.
∙ Work with a tax professional to prevent underpayment or overpayment.
This may seem like the boring part of running a business, but good record-keeping is essential for tax optimisation and compliance. Ensure you:
∙ Keep detailed receipts and invoices for all deductible expenses.
∙ Maintain a separate business bank account to avoid confusion between personal and business finances.
∙ Use accounting software or hire a professional accountant to track income and expenses efficiently.
Proactively managing your business and personal taxes can reduce your tax burden and ensure financial stability. However, this can be overwhelming to small business owners who already have loads to think about.
If you need expert guidance on optimising your personal and business tax, reach out to our experienced team at Huysamen Westraad Inc. Our friendly accountants can help you maximise deductions, structure income efficiently, and stay compliant with SARS. Contact us today for personalised tax planning tailored to your personal and small business needs.
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