Understanding How Directors Can Draw Money from Their Company
As a director, you might often wonder how to get funds from your company. It’s important to understand that how you take money from the company depends on a few things.
These include your role, the company’s financial health, and legal rules. Let’s look at the three main ways directors can take money from a company. This will help you understand what is allowed and what isn’t.
1. Director’s Salary
One of the easiest ways for a director to earn money from a company is through a salary. If you are a director and offer services to the company, you can get a salary. This salary is the same as what other employees receive.
- How It Works: You get regular payments, usually every month. The company will take out PAYE, which is paid to SARS.
- Requirements: Your salary needs approval from shareholders. If you are the only shareholder, you still must follow company rules to approve it.
- Tax Implications: Your salary is subject to personal income tax. The company must make all required deductions, like UIF (Unemployment Insurance Fund).
2. Director’s Loan
If you need money but don’t want to take a salary, you can get a loan from the company. This is like a personal advance where you borrow money. The company will lend you money, and you will need to pay it back later. If you lend money to your company then interest might apply.
- How It Works: The amount you borrow is noted in the company’s records as a loan. You must repay this loan. Depending on the terms, you may have to pay interest.
- Requirements: The loan must be documented correctly. The Companies Act says the board of directors must approve the loan. The company must also pass the solvency and liquidity test. This test ensures the company can still pay its debts.
- Tax Implications: SARS might see the loan as a fringe benefit if it has no interest or a low rate. This means you may need to pay tax on this benefit. Also, if you do not repay the loan, it could be treated as a deemed dividend. This could lead to Dividend Withholding Tax (DWT).
3. Dividends (If You’re Also a Shareholder)
Dividends are payments to shareholders from a company's profits. You can only get dividend income if you are a company director and a shareholder. This means that if you own shares, you can receive dividends when the company shares its profits.
- How It Works: Dividends can only be declared if the company has enough retained earnings, or profits. It must also pass the solvency and liquidity test under the Companies Act. This ensures the company can meet its financial obligations after paying dividends.
- Requirements: Dividends need approval from the board of directors. The company must follow formal steps. This includes holding a board meeting and passing a resolution to declare the dividend.
- Tax Implications: Dividends are taxed with a Dividend Withholding Tax (DWT) of 20%. This means the company will keep 20% of the dividend. They will pay this amount to SARS for you. You will get the remaining 80% after tax.
Which Option Should You Choose?
- Salary: Great for regular income, but it has tax implications (PAYE).
- Loan: This can be helpful if you need a short-term advance. However, remember that you have to repay it and there may be tax consequences.
- Dividends: Dividends are only available to shareholders and depend on company profits. They are taxed at a lower rate of 20%. This is less than the income tax on a salary. However, the company must be profitable and meet legal rules to declare dividends.
Final Thoughts
It’s important to follow the right steps when taking money out of a company. Always make sure you follow the Companies Act. Keep good records and stay aware of your tax duties. If you are unsure about the best option for you, it’s wise to talk to a Professional Accountant or Tax Practitioner.
By using the right approach, you can manage your company’s money wisely and stay within the law. Being tax efficient and paying corporation tax can be a juggling act. Many things need to be considered for example business expenses, tax and national insurance like unemployment insurance. The tax rates on assessment of your tax return will depend largely on the tax structure.
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