How entrepreneurs save tax
So, what is the real tax cost of the salary that you draw from your own company?
You, and many like you, may be pleasantly surprised.
What most people forget is that when they draw salary from their company, this is a tax deductible expense, so the company saves 27% tax (currently 28%, but coming down).
So, let’s say you’re under 65 and that the only income that you receive is from your company.
Your company owes you some start-up money and you charge R23 800 interest per annum on that loan.
The first R23 800 interest received is tax free in your hands and it is a tax deductible expense for the company.
You draw R68 133 salary per month, a total of R817 600 per year and pay total tax of R223 027.
The company has expenses of R23 800 interest and R817 600 salary. Because of these expenses, its tax is reduced by R227 178.
So, if you didn’t draw anything from the company, it would pay R227 178 more tax and you would pay nothing. If you did draw the above, you will pay R223 027 and the company will save R227 178
This means that your income is tax neutral.
Draw less and it’s tax negative. Draw more and it’s tax positive, but even at R144 300 per month the net tax is only 7%.
If your company is a Small Business Corporation, the math is more complicated, but usually the lower the salary, the lower is the net tax paid.