Small Business Tax Rates in South Africa.

Small Business Tax Rates in South Africa

Small businesses in South Africa do not pay a single flat tax rate. The rate you pay depends on how your business is registered. If you are a sole proprietor, your business income is added to your personal income and taxed at normal SARS personal income tax rates. If you have a registered company, you pay Small Business Corporation tax rates, which start at zero percent for lower income brackets and go up to twenty seven percent for higher amounts.

How tax works for sole proprietors

A sole proprietorship is not a separate legal entity from you. SARS sees you and your business as the exact same thing. This means all the profit your business makes is simply added to your personal salary or any other income you earn.

You are taxed according to the standard personal income tax tables. Every year, SARS announces a tax threshold. If your total income, including your business profit, falls below this threshold, you do not pay income tax. Once you go above it, you pay tax on a sliding scale. You must register for income tax with SARS once your income reaches the required threshold.

How tax works for a registered company

When you register a private company with the Companies and Intellectual Property Commission, also known as CIPC, your business becomes a separate legal entity. The company pays its own tax.

The standard corporate income tax rate in South Africa is twenty seven percent. However, the government wants to help small businesses grow, so they created a special tax regime for qualifying small businesses. This is called the Small Business Corporation tax regime.

Small Business Corporation tax rates

If your registered company qualifies as a Small Business Corporation, you pay tax on a sliding scale that is much lower than standard corporate tax. The exact amounts change slightly each year when the Minister of Finance announces the budget.

Generally, the rates work like this. Your company pays zero percent tax on taxable income up to a certain threshold. For the next bracket of income, you pay seven percent. As your income increases, you move into a higher bracket where you pay twenty one percent. Finally, for any taxable income above a higher threshold, you pay twenty seven percent.

This system is designed to give small businesses breathing room in their first few years of operation.

Turnover tax for micro businesses

SARS also has a system called turnover tax for very small businesses. This is meant for micro businesses that have a low annual turnover.

Turnover tax is a simplified system. Instead of calculating your complex profits and deducting expenses, you simply pay a small percentage of your total sales. The first bracket of turnover is usually taxed at zero percent. As your turnover increases, you pay a slightly higher percentage.

This option is available to sole proprietors, partnerships, and registered companies, as long as their qualifying turnover stays below the SARS limit. You must specifically apply to SARS to switch to turnover tax.

How to qualify as a Small Business Corporation

Not every registered company automatically gets the lower Small Business Corporation tax rates. You must meet specific rules set by SARS.

All the shareholders or members of the company must be natural persons. This means no other company or trust can own shares in your business. The shareholders cannot hold shares in other companies, unless those other companies are also small businesses. Your business cannot earn more than a certain percentage of its income from investment income or personal service providers.

If you meet these rules, you can elect to be taxed as a Small Business Corporation when you file your annual income tax return.

Value Added Tax and Pay As You Earn

Income tax is not the only tax you need to think about. You might also need to register for Value Added Tax, known as VAT.

You only have to register for VAT if your business makes more than one million rand in taxable turnover over a twelve month period. You can register voluntarily if your turnover is lower, but you must be sure it benefits your business. When you are VAT registered, you charge fifteen percent VAT on your sales and claim back the VAT you pay on your business expenses.

If you have employees, you must register for Pay As You Earn, or PAYE. You deduct tax from your employees' salaries and pay it to SARS every month. You also need to register for the Skills Development Levy and the Unemployment Insurance Fund if you meet the employee count thresholds.

Getting your business registered and compliant

Before you can worry about tax rates, you need a registered business and proper compliance documents. You cannot open a business bank account or get a tax clearance certificate without registering your company with CIPC and SARS.

This is where KAGO can help you get started the right way. We handle the paperwork so you can focus on running your business. Our Registration Basic package costs R995 and gets your company registered with CIPC. If you need more help getting your SARS details and share certificates in order, our Compliance Kit costs R2,495.

If you want to apply for funding, funders will want to see your company registration documents and a clear tax status. KAGO can make your business funding ready, but remember the final decision to fund your business always rests with the funder.

Keep your records straight

No matter what tax rate you fall under, you cannot guess your tax obligations. You must keep proper records of every cent you earn and every cent you spend.

Use a simple spreadsheet or an accounting programme to track your income and expenses every month. Keep all your invoices and receipts. When tax season comes, you will need to submit an income tax return to SARS. If your records are clean and accurate, you will pay the correct amount of tax and avoid penalties. If you are unsure about your specific situation, it is always best to consult a registered tax practitioner.

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