One of the most common questions I get asked by Business Owners is: What is the best way to take money out of the business?

When they ask this, they usually mean: How do I pay myself while paying the least amount of tax? 👀

In this newsletter, I’ll discuss the different ways of taking money out of your business, the advantages and disadvantages of each method, and my suggestions on the best way to do it.

I have split this into 2 parts because it is a lot to consume and I want you to read to the end. So today, I’ll cover the shareholder loan and salary and tomorrow will be dividends and owner’s drawings.

I highly suggest you read both parts, because it’s worth it even if you save R1000 on your taxes.

Prepare for cash shortfalls by preparing a cash flow forecast in this FREE live 1-hour training:

​https://bit.ly/47PEx4h​

Disclaimer

This article is not financial advice. It’s for informational purposes only. Tax laws and rules are complicated and can change. Always talk to your accountant or a qualified financial advisor before making any financial decisions. The examples given are just for illustration and may not fit your specific situation. Getting professional advice tailored to your own circumstances is important for following the rules and planning well.

Let’s get into it.

If you are an Owner run business, there are a few ways to take money out of your business

1. Pay yourself through the shareholder loan (Companies)
2. Pay yourself a salary (Companies)
3. Declare a dividend (Companies)
4. Take money out through owner’s drawings (Sole Proprietor)

Which method you use depends on whether you have a registered company or are operating as a sole proprietor.

If you have a registered company, do you have a shareholder loan? What are the business goals? Do you want to reinvest the profits to grow the business? Do you have sufficient cash flow to pay yourself?

These are all important questions to ask before deciding how much to take out of the business.

Paying yourself using a shareholder loan

If you manage a company and have invested a significant amount of money in the business, the business will owe you money through the shareholder loan account.

This loan account earns interest, and the amount owed increases yearly.

The interest you earn needs to be declared in your personal tax return and when the loan is repaid, the repayment will reduce the balance of the loan.

Since it’s a repayment of the loan, these payments are not taxable. However, if the loan is interest-free or the interest rate is below market rate, the below-market interest will be taxable.

The downside of getting paid this way is it only works if you have an amount owing to you, and there needs to be paperwork in place between you and the company detailing interest rates, payment plans etc.

This option is not available for sole proprietors because a sole proprietor is just an individual doing business. There is no separate structure created for the business, and it’s not possible to have a loan with yourself.

Advantages

• Tax-free
• Deductible interest to reduce your taxable profit

Disadvantages

• Only works if you have a shareholder loan balance
• Need to include interest in your personal tax return (to which you apply the personal interest rebate)
• Need to have a contract in place
• Not available for sole proprietors

​

Example

I have invested R240 000 into my company Best Company (Pty) Ltd for the last 2 years (R120 000 per year). The loan attracts interest at 7% per annum, calculated at the end of the year.

At the end of February 2024, I can withdraw R265 788 tax-free from the business.

Note: If you take out more than R265,788 from the business, you will need to pay either PAYE (employee’s tax) or dividends tax on the difference.

So, if I take out R300 000 at the end of February 2024, I will need to pay either PAYE or dividends tax on R34 212 (R300 000-R265 788).

Pay yourself a salary

To pay yourself a salary you need to be registered as an employer. And if you are the only employee in the business, the tax admin can be a nuisance. As an employer, you need to register with:

• SARS as an employer to submit and pay monthly PAYE, which
• With the Department of Labour to submit UIF and Workman’s comp which are 2 separate systems
• For Skills Development Levy if your total payroll is greater than R500 000, which is another system

Employee’s Tax is paid on a sliding scale and you can deduct the Individual Tax rebate:

One of the most common questions I get asked by Business Owners is: What is the best way to take money out of the business?When they ask this, they usually mean: How do I pay myself while paying the least amount of tax? 👀In this newsletter, I’ll discuss the different ways of taking money out of your business, the advantages and disadvantages of each method, and my suggestions on the best way to do it.I have split this into 2 parts because it is a lot to consume and I want you to read to the end. So today, I’ll cover the shareholder loan and salary and tomorrow will be dividends and owner’s drawings.I highly suggest you read both parts, because it’s worth it even if you save R1000 on your taxes.

Prepare for cash shortfalls by preparing a cash flow forecast in this FREE live 1-hour training:​https://bit.ly/47PEx4h

Disclaimer
This article is not financial advice. It’s for informational purposes only. Tax laws and rules are complicated and can change. Always talk to your accountant or a qualified financial advisor before making any financial decisions. The examples given are just for illustration and may not fit your specific situation. Getting professional advice tailored to your own circumstances is important for following the rules and planning well.

Let’s get into it.

If you are an Owner run business, there are a few ways to take money out of your business
1. Pay yourself through the shareholder loan (Companies)
2. Pay yourself a salary (Companies)
3. Declare a dividend (Companies)
4. Take money out through owner’s drawings (Sole Proprietor)

Which method you use depends on whether you have a registered company or are operating as a sole proprietor.

If you have a registered company, do you have a shareholder loan? What are the business goals? Do you want to reinvest the profits to grow the business? Do you have sufficient cash flow to pay yourself?

These are all important questions to ask before deciding how much to take out of the business.

Paying yourself using a shareholder loan

If you manage a company and have invested a significant amount of money in the business, the business will owe you money through the shareholder loan account.

This loan account earns interest, and the amount owed increases yearly.
The interest you earn needs to be declared in your personal tax return and when the loan is repaid, the repayment will reduce the balance of the loan.

Since it’s a repayment of the loan, these payments are not taxable. However, if the loan is interest-free or the interest rate is below market rate, the below-market interest will be taxable.

The downside of getting paid this way is it only works if you have an amount owing to you, and there needs to be paperwork in place between you and the company detailing interest rates, payment plans etc.

This option is not available for sole proprietors because a sole proprietor is just an individual doing business. There is no separate structure created for the business, and it’s not possible to have a loan with yourself.

Advantages
Tax-free
Deductible interest to reduce your taxable profit

Disadvantages
Only works if you have a shareholder loan balance
Need to include interest in your personal tax return (to which you apply the personal interest rebate)
Need to have a contract in place
Not available for sole proprietors

Example
I have invested R240 000 into my company Best Company (Pty) Ltd for the last 2 years (R120 000 per year). The loan attracts interest at 7% per annum, calculated at the end of the year.

Tax Rebate​​

Total Rebate Under-65: R17 235

Total Rebate Over 65 less than 75: R26 679

Total Rebate over 75: R29 824

Paying salaries can be a pain, but in many situations, if it is a company and you want to extract all the profit from the business, salaries are the most tax-efficient way.

If you are the only person working in a sole proprietorship, you do not need to withdraw profits using a salary and pay employee’s tax; you can withdraw using the owner’s drawings. More on this in part 2 tomorrow. However, If you’re a sole proprietor with employees, you would need to register as an employer to pay them.

Advantages

• Pay monthly, so no big payment due at the end of the year
• If you withdraw all the profits using your salary, can be the lowest overall tax paid.

Disadvantages

• Admin can be a bit of a nightmare; you deal with 3 different government departments. But once it is set up, will go smoothly.
• If you register as an employer, there are other payroll costs as well: UIF (2% of salary – maximum R17k per annum) and workman’s comp which is 1%

Example

I have a Company Best Business (Pty) Ltd. I pay myself a salary of R30 000 per month.

​My PAYE calculation is as follows:

Individual tax 2024

Salary (R30 000 x12) = R360 000

Annual PAYE = R74 632

Individual tax Rebate = R17 235

Total tax owed for the year = R74 632 – R17 235 = R57 397

Monthly PAYE = R4 783

That’s all for today. In tomorrow’s email I’ll cover dividends and owner’s drawings. In the meantime, if you are a company and you have a shareholder loan account, please look at it and see if it is a negative or positive. If it is a negative, it is overdrawn and will need to be declared as a dividend or salary which means tax will need to be paid on it.

​

Until tomorrow for part 2..

​Praneeta

PS: If you haven’t already, connect with me on Linkedin and tell me what you’re struggling with. I am happy to share free resources with you.