Run your trade through a one-person Pty Ltd while working mainly for one client, and SARS can classify the company as a Personal Service Provider (PSP). The client must then withhold employees' tax off your invoices before paying you, and section 23(k) of the Income Tax Act blocks most of the company's deductions. It is the single biggest tax risk for a tradie who incorporates, and it is entirely avoidable with a genuinely independent business.
First, the normal one-person company
Outside the trap, extracting profit is a balancing act:
- Salary: the company deducts PAYE monthly (EMP201 by the 7th) and the salary is deductible for the company. You pay personal rates.
- Dividends: paid from profit after the company has paid its 27% tax, with 20% dividends withholding tax on the payout. Fully extracting profit this way costs about 41.6% combined.
The usual play is a salary near the personal tax threshold (R99,000 for 2026/27) plus dividends, tuned with retirement contributions. The full comparison is in Sole Prop vs Pty Ltd vs Turnover Tax. All of it presumes the company is not a PSP.
What makes a company a PSP
A company, CC or trust is a PSP when the service is rendered personally by a connected person (you, the sole director), and any one of these is true:
- The employee test: without the company in between, you would look like the client's employee, working under their supervision and control
- The premises test: you work mainly at the client's premises, subject to their supervision
- The 80% test: more than 80% of the company's service income comes from one client (or an associated institution)
The escape hatch: the company is not a PSP if it employs three or more full-time staff, not connected to you, actively working in the service business all year.
What classification costs you
- Payments to the company are deemed remuneration, and the client must withhold employees' tax before paying you. Published guidance currently conflicts on whether the fixed company withholding rate is 27% or 33%, so confirm the current rate against SARS Interpretation Note 35 before relying on a number.
- Section 23(k) blocks the company from deducting most business expenses (essentially only staff remuneration and a few others survive).
- SBC status is also off the table, since a PSP cannot qualify (see the tests in Sole Prop vs Pty Ltd vs Turnover Tax).
Withholding off gross invoices plus blocked deductions usually leaves you worse off than if you had never incorporated.
What this looks like on site
A builder working for one main contractor, at that contractor's sites, on that contractor's programme and instructions: the 80% test and the premises test are both lit up. A tradie with several clients, their own tools and bakkie, their own schedule and their own yard: a genuine business, not a PSP.
If you have one dominant client, document your independence deliberately: your own tools and insurance, your own working methods and hours, other clients even if smaller, quotes and contracts in the company's name. Or hire the three unconnected employees and put the question to bed.
Worked example
A one-person Pty Ltd earns R600,000 for the year, all from one building firm. The 80% test is met, so the company is a PSP: the firm must withhold employees' tax off every invoice at the fixed company rate (confirm the current rate against Interpretation Note 35), and the company loses its expense deductions under section 23(k). After withholding off the gross and tax on what remains, the tradie typically ends up behind a plain sole prop earning the same R600,000.
Same tradie, five clients, the biggest at 60% of revenue: the 80% test fails, no PSP, and the company keeps its deductions and its planning options.
Common mistakes
- Incorporating to please one main contractor. That is the exact shape of the trap.
- Assuming a company contract settles it. SARS looks at the working reality, not the letterhead.
- Missing the slow drift to one client. The 80% test is yearly; a quiet year can tip you in.
- Guessing the withholding rate. Confirm it against Interpretation Note 35; the published figures conflict.
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