Short answer
Declaring dividends is not a bad idea in every case. It becomes a poor choice when profit has already been taxed in the company and the shareholder then pays a second layer of tax on the same profit. This post sets out the numbers so that you can see where the cost comes from.
The two layers of tax
The company tax rate is 27% for years of assessment ending between 1 April 2026 and 31 March 2027 (SARS). When a company pays a dividend to an individual, dividends tax of 20% must be withheld by the company
Calculation on R100 of profit:
- Company tax: R100 × 27% = R27.00
- Profit available to distribute: R100 − R27.00 = R73.00
- Dividends tax: R73.00 × 20% = R14.60
- Net to the shareholder: R73.00 − R14.60 = R58.40
- Total tax: R27.00 + R14.60 = R41.60, which is 41.6%
The break-even marginal rate is 100% − 58.4% = 41.6%.
On these simplified assumptions, a deductible salary leaves more in hand when the shareholder’s marginal rate is below 41.6%. Above that rate, dividends leave more. The calculation ignores SDL, UIF and rebates.
Individual brackets of 18% to 45% for the 2026 tax year. The thresholds for 2026/27 did change slightly but can be ignored for the purposes of this example.
Other drawbacks
The points below come from general knowledge of the legislation, not from the sources listed at the end. Confirm them before relying on them.
- A dividend is not a deductible expense for the company. A reasonable salary generally is.
- The Companies Act requires the board to be satisfied that the company passes the solvency and liquidity test before it makes a distribution.
- Dividends are exempt from income tax. They are therefore probably not treated as taxable income for retirement fund deduction purposes.
Small business corporation rates compared
SARS publishes the following rates for years of assessment ending between 1 April 2026 and 31 March 2027:
- R1 to R99,000: 0%
- R99,001 to R365,000: 7% of taxable income above R99,000
- R365,001 to R550,000: R18,620 plus 21% of taxable income above R365,000
- R550,001 and above: R57,470 plus 27% of the amount above R550,000
The table assumes the whole after-tax profit is distributed to an individual who is not exempt.
| Taxable income | Company tax | Profit after tax | Dividends tax at 20% | Net to shareholder | Total tax |
|---|---|---|---|---|---|
| R90,000 | R0 | R90,000 | R18,000 | R72,000 | 20.0% |
| R365,000 | R18,620 | R346,380 | R69,276 | R277,104 | 24.1% |
| R550,000 | R57,470 | R492,530 | R98,506 | R394,024 | 28.4% |
| R1,000,000 | R178,970 | R821,030 | R164,206 | R656,824 | 34.3% |
Workings for the largest row: R57,470 + (R1,000,000 − R550,000) × 27% = R57,470 + R121,500 = R178,970. Then (R1,000,000 − R178,970) × 20% = R164,206.
What the table shows:
- At every level shown, the combined burden is below the 41.6% in the standard-rate example.
- The dividends tax layer is a fixed 20% of what is distributed. At low profit levels it is the larger part of the total tax.
- Whether salary or dividends leaves more money in hand depends on the shareholder’s marginal rate and on UIF and SDL.
Who is exempt from dividends tax
Exemption depends on the recipient of the dividend, not on the company that pays it. The recipient must submit the required declaration and undertaking to the paying company in time. SARS lists the following among the beneficial owners that could be exempt:
- South African resident companies
- Government in all three spheres
- Public benefit organisations approved under section 30(3)
- Funds under section 10(1)(d), for example pension funds, provident funds and medical schemes
- Shareholders in a registered micro business, to the extent that dividends do not exceed R200,000 per year
- Natural persons, for dividends paid on or after 1 March 2015 on a tax-free investment
Please check these are accurate before making decisions for your company
What to do before you declare
- Work out the company tax on the profit at the rate that applies to your company.
- Compare the net amount in hand under a dividend and under a salary, using the shareholder’s actual marginal rate.
- Confirm that the company passes the solvency and liquidity test and has the cash.
- Check whether the shareholder qualifies for an exemption and submit the declaration in time.
- Ask a registered tax practitioner to confirm the position for your specific case.
Important Notes
This post is general information and not tax advice.
Rates apply to the 2026/27 tax year unless stated otherwise.
Please consult Bruce from BC Accounting if you need specific tax advice.
bruce@bcas.co.za