Director Pay in South Africa: Salary, Dividends or Commission?

A close-up of a black pen, calculator, and stacked coins on financial documents with charts and tables, representing accounting, tax, and director remuneration planning.

One of the questions directors ask us most often is:

“What is the best way to pay myself as a director—salary, dividends, or commission?”

The truth is there isn’t one universal answer. Each option has its own tax consequences, and the most effective approach usually combines more than one. Let’s break it down.

Option 1: Salary

A salary is the most straightforward way to remunerate a director. The company claims it as an expense, which reduces taxable profits and therefore corporate income tax.

On your side, however, the entire amount is subject to PAYE at your marginal tax rate. Section 23(m) of the Income Tax Act also restricts the deductions you can claim personally. This means that, as a salaried director, you generally cannot deduct wider business expenses such as travel or entertainment against your income.

Still, there are valid reasons for keeping a base salary:

  • It creates a foundation for retirement fund contributions (deductible up to 27.5% of remuneration or taxable income, capped at R350 000).
  • Medical aid tax credits are applied monthly via payroll.
  • UIF and SDL compliance are straightforward.

The trade-off is simplicity versus limited tax flexibility.

Option 2: Dividends

Dividends do not go through PAYE. Instead, they follow a two-step tax process:

  1. The company pays corporate income tax (CIT) at 27%.
  2. Shareholders pay dividends tax (DWT) at 20% on the amount distributed.

If you distribute all taxable profits as dividends, the combined effective tax comes to around 41.6%. This makes dividends neat for paying out surplus profits, but they should not be relied on as the sole form of director pay.

Option 3: Commission-based pay

When more than half of a director’s remuneration is structured as commission or performance-linked pay, SARS classifies you as a commission earner. This is a crucial distinction, because it unlocks deductions that are normally blocked under section 23(m).

If you legitimately qualify as a commission earner, you may deduct:

  • Home office costs (subject to the usual requirements).
  • Travel expenses, provided you keep a proper SARS logbook.
  • Client entertainment expenses incurred in earning commission.
  • Professional fees such as accounting or legal services used to generate that income.

The key word is legitimate. Commission must be tied to measurable outcomes—sales closed, contracts signed, revenue generated—and documented in your service or employment agreement. Artificially labelling income as “commission” when no link to performance exists risks disallowance, and SARS has the tools to challenge it under the General Anti-Avoidance Rule (GAAR, Part IIA, sections 80A–80L).

A Practical Example: R1 Million Company Profit

To see how this plays out, imagine a company with R1 000 000 pre-remuneration profit.

Scenario Structure PAYE CIT DWT Net to Director Effective Tax Rate
A) Salary only Salary R1 000 000 R292 284 — — R707 716 29.2%
B) Salary + Commission Salary R400 000 + Commission R600 000, with R120 000 valid deductions R243 084 — — R756 916 24.3%
C) Salary + Dividends Salary R600 000; balance R400 000 distributed as dividends after CIT R135 632 R108 000 R58 400 R697 968 30.2%

 

Result: The commission structure (B) produces the lowest effective tax rate and the highest take-home pay—but only if the commission is genuine and properly documented.

 

Governance and Compliance

No matter which mix you choose, always keep governance in mind:

  • Document it: Service agreements should specify how salaries, commission, and dividends are determined.
  • Approve it: Shareholder resolutions are required for directors’ fees. Executive remuneration should follow your Memorandum of Incorporation (MOI) and board policies.
  • Process it correctly: Salaries and commission must run through payroll with PAYE, UIF and SDL where applicable. Dividends must be declared and recorded properly, with dividends tax withheld and paid to SARS.
  • Keep records: Expense claims must be backed up by logbooks, invoices and supporting documents.

Key Takeaways

  • A salary provides stability but offers limited deductions.
  • Dividends are useful for distributing profits, but the combined tax is higher than many directors realise.
  • Commission-based pay can be highly efficient, provided it is genuinely linked to performance and fully compliant.
  • A blended approach—salary for stability, commission for legitimate expense flexibility, dividends for surplus profits—often delivers the best balance.

    Final Word

    How directors are paid is not just an accounting detail—it’s a strategic decision that affects tax, cash flow, compliance, and long-term planning.

    Every company is different. The right structure depends on your profit levels, business model, shareholder mix, and personal tax profile.

    At On Q Accounting & Tax Services, we regularly help directors strike the right balance. If you want tailored advice—and a clear picture of how the numbers look for you—chat to us.

    Disclaimer: This article is intended for general information purposes only and does not constitute professional tax advice. For tailored guidance, please speak to a registered tax practitioner.