Sole Prop vs Pty Ltd vs Turnover Tax

Most tradies should start as a sole proprietor and only incorporate once profits are consistently strong. A Pty Ltd pays a flat 27% company tax, but getting the money out triggers dividends tax at 20% on top, so the combined bite on profit you fully extract is about 41.6%. The real savings sit in the Small Business Corporation (SBC) rates and in a well-judged salary-and-dividend mix, and both come with strict conditions.‍‌​‌​‌‌​​‌‌​​‌​​‌​​​‌‌‌‌‌​‌‌​‌​‌​‍

The four options

• Sole prop: your profit is taxed at personal marginal rates of 18% to 45% (see Income Tax for a Self-Employed Tradie). Zero setup admin, but no liability shield.
• Pty Ltd (normal company): flat 27% corporate income tax, per SARS's company rates page, plus 20% dividends withholding tax when profit is paid out to you.
• Pty Ltd qualifying as an SBC: progressive company rates that start at 0% at the bottom and top out at 27%. The bands move with the Budget, so check the current table on SARS's small business corporation rates page before running numbers.
• Turnover tax: for micro businesses with qualifying turnover up to R2.3 million (raised from R1 million with effect from 1 April 2026, per SARS's turnover tax page). Tax is charged on gross turnover, not profit, at low rates with a zero band at the bottom; check the current SARS turnover tax table for the bands.

The SBC qualifying tests (section 12E)

Every test must be passed in every year of assessment:

• The entity is a private company, close corporation, co-operative or personal liability company
• All shareholders or members are natural persons
• No shareholder holds shares in any other company (dormant shells with assets under R5,000 excepted)
• Gross income is R20 million or less for the year
• Investment income plus personal service income is no more than 20% of total receipts
• The company is not a personal service provider, unless it employs three or more full-time unconnected staff in the trade (see The Personal Service Provider Trap)

Turnover tax: who it actually suits

Turnover tax replaces income tax, provisional tax, capital gains tax and dividends tax (and optionally VAT) with one small tax on turnover. Because it ignores your costs, it only works when margins are fat. A builder turning over R1.8 million with heavy materials costs and a thin profit will usually pay more under turnover tax than under normal income tax on the actual profit. Run both calculations before electing in.

Getting money out of a company

A salary is deductible for the company and taxed in your hands at personal rates, with PAYE run monthly. A dividend is different: it is paid from profit after the company has already paid its 27% tax, and SARS then withholds 20% dividends tax from the payment.

On R100 of company profit paid all the way out: R27 company tax first, then 20% of the remaining R73 is another R14.60, leaving R58.40 in your pocket. That is the 41.6% combined rate. A common structure is a salary around the personal tax threshold (R99,000 in 2026/27) to use the rebate and the low brackets, dividends for the rest, and retirement annuity contributions to trim further (see Retirement Annuities and Tax). The optimal split shifts with income, so get professional advice before locking it in.

Worked example: R600,000 profit (2026/27)

Sole prop: tax is R125,599 plus 36% of the R69,800 above R530,200, which is R150,727, less the R17,820 rebate: R132,907 (effective rate 22.2%).

Normal Pty Ltd, everything paid out as dividends: company tax of 27% on R600,000 is R162,000, leaving R438,000 of after-tax profit. Dividends tax of 20% on R438,000 is another R87,600. Total: R249,600 (41.6%). Far worse than staying a sole prop.

The company only starts winning when profit is retained for growth, when the SBC table applies (at this profit level a qualifying SBC pays substantially less at company level than the flat 27%; check the current SARS table), or when the salary-and-dividend mix is engineered properly. Incorporation is a planning decision, not a default upgrade.

Quick decision guide

• Stay sole prop: profit under roughly R200,000, income still irregular, simplicity matters most.
• Consider an SBC Pty Ltd: profit consistently above R200,000 to R300,000, genuine site liability risk, tenders that want a company, or profit you want to retain and reinvest.
• Consider turnover tax: genuine micro business under R2.3 million turnover with high margins and minimal record-keeping appetite.

Common mistakes

• Incorporating for status. A Pty Ltd with all profit extracted as dividends is the most expensive structure on the list.
• Forgetting dividends tax. The 27% headline rate is not the whole story; extraction costs another 20% of what is left.
• Electing turnover tax with thin margins. Tax on turnover ignores your costs entirely.
• Failing an SBC test by accident. One corporate shareholder, or a second company in your name, disqualifies the whole year.

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