Understanding How Directors Can Draw Payments from Their Company
As a director, you may often wonder how you can access funds from your company. It’s important to know that the way you take money out of the company depends on a few factors, including your role, the company’s financial health, and legal requirements. Let’s break down the three main ways directors can withdraw money from a company in simple terms, so you know what’s allowed and what’s not.
1. Director’s Salary
One of the most straightforward ways for a director to get money from a company is through a salary. If you, as a director, provide services to the company (like managing day-to-day operations), you can be paid a salary just like any other employee.
How It Works: You receive regular payments (usually monthly), and the company will deduct PAYE (Pay-As-You-Earn tax), which is paid to SARS.
Requirements: Your salary must be approved by shareholders. If you’re the only shareholder, you’ll still need to follow company procedures to approve it formally.
Tax Implications: Your salary is subject to personal income tax, and the company must ensure that all statutory deductions, such as UIF (Unemployment Insurance Fund), are made.
2. Director’s Loan
If you need funds but don’t want to take a salary, you can also take out a loan from the company. This works like a personal advance where the company lends you money, which you’ll eventually need to repay.
How It Works: The amount you borrow is recorded in the company’s books as a loan. You will be required to repay this loan, and depending on the terms, interest may be charged.
Requirements: The loan needs to be properly documented. The Companies Act requires that the loan be approved by the board of directors, and the company must be able to pass the solvency and liquidity test to ensure it can still pay its debts.
Tax Implications: SARS may consider the loan a fringe benefit if the loan is interest-free or charged below the market rate, meaning you may have to pay tax on this benefit. Additionally, if the loan is not repaid, it could be classified as a deemed dividend, which may trigger Dividend Withholding Tax (DWT).
3. Dividends (If You’re Also a Shareholder)
Dividends are payments made to shareholders from the company’s profits. However, you can only receive dividends if you are both a director and a shareholder. This means that if you own shares in the company, you can receive dividends when the company decides to distribute profits.
How It Works: Dividends can only be declared if the company has enough retained earnings (profits) and passes the solvency and liquidity test under the Companies Act. This ensures the company can still meet its financial obligations after paying dividends.
Requirements: Dividends must be approved by the board of directors, and the company needs to follow formal procedures, such as holding a board meeting and passing a resolution to declare the dividend.
Tax Implications: Dividends are subject to Dividend Withholding Tax (DWT) at a rate of 20%, meaning the company will withhold 20% of the dividend and pay it to SARS on your behalf. You will receive the remaining 80% after tax.
Which Option Should You Choose?
Salary: Best for regular income, but comes with tax implications (PAYE).
Loan: Useful if you need a temporary advance, but be aware of repayment obligations and possible tax consequences.
Dividends: Only available if you are a shareholder, and it’s based on company profits. Dividends are taxed at a lower rate (20%) compared to income tax on a salary, but the company must be profitable and meet legal requirements to declare them.
Final Thoughts
It’s essential to follow the correct processes when withdrawing money from a company. Always ensure you comply with the Companies Act, maintain good record-keeping, and stay on top of your tax obligations. If you're unsure about which option is best for you, it’s a good idea to consult with a Business Accountant in Practice (BAP) or a tax advisor.
By understanding the right approach, you can manage your company’s funds responsibly while staying within the law.
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