With effect from 1 March 2015, the highest marginal income tax rate for individuals was increased from 40% to 41%. It appears likely that the rate may increase in future, which means individuals should try to minimise their personal income tax as far as possible.

The highest marginal rate takes effect on taxable income above the amount of R701,301.

There is an opportunity for owners of closely held companies and close corporations to reduce their personal taxes by using the arbitrage between the highest marginal rate, on the one hand, and the corporate income tax rate and the dividends tax rate, on the other hand.

Consider, for example, the case of Ms X who holds 100% of the shares in Company Y and who is employed by Company Y. For the 2015 tax year, Ms X wishes to realise a pre-tax income of R1,5 million.

Now, if Company Y pays Ms X a salary of R1,5 million, she will realise a net, after-tax income as follows:

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However, if, instead of paying Ms X a salary only, the company pays Ms X a salary and a dividend, she will realise a net, after-tax income as follows:

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It is apparent that Ms X realises a higher net, after-tax return in the case where the company pays a salary and a dividend. In fact, she receives R20,842 more.

Naturally, as the amount available for payment as a salary and dividend increases, the saving becomes more signifi cant.

Does the above course of action constitute impermissible tax avoidance? No. It is trite that a person is allowed to arrange her affairs to minimise her taxes. It is normal for a company to pay a salary and dividend to a shareholder who is also an employee of the company.