Employee, contractor or your own company: who pays the least tax on the same income?
On R600 000 a year, a contractor who can deduct R60 000 of costs keeps about R21 600 more than an employee - and a one-person Pty Ltd can end up keeping less than both.
In 30 seconds
- Deductions, not the tax rate, make the difference: on R600 000 a contractor keeps R21 600 more than an employee - the R60 000 of work costs taxed at 36%.
- Money taken out of a company is taxed twice: 27% company tax, then 20% dividends tax - about 41.6% in total.
- A company is not automatically cheaper: on R600 000 you keep R390 828, against R428 693 as a sole proprietor in our example.
The 2026/27 rates you are working with
| Tax | Rate |
|---|---|
| Individuals (employee or sole proprietor) | 18% to 45%, by bracket |
| Primary rebate (under 65) | R17 820 |
| Tax-free threshold (under 65) | R99 000 |
| Company income tax | 27% |
| Dividends tax | 20% |
Individual brackets run from 18% on the first R245 100 to 45% above R1 878 600. SARS: rates for individuals · SARS: companies · SARS: dividends tax
Same R600 000, three ways
Take R600 000 of income and R60 000 a year of genuine work costs - laptop, phone, software, travel to clients.
| Structure | Tax | You keep |
|---|---|---|
| Salaried employee | R132 907 | R407 093 |
| Contractor (sole proprietor) | R111 307 | R428 693 |
| Pty Ltd (R300 000 salary, rest as dividend, R15 000 admin) | R134 172 | R390 828 |
- The contractor saves R21 600 - exactly the R60 000 of costs taxed at the 36% marginal rate.
- The company loses because profit paid out as dividends is taxed at about 41.6%, and the books cost money to keep.
Change the numbers below. A company starts to make sense when profit is left inside it to reinvest, rather than paid out every year.
What is - and is not - deductible
- Employee: almost nothing beyond retirement fund contributions and medical scheme tax credits. Work costs you pay yourself are generally not deductible.
- Sole proprietor: costs incurred to earn the income - equipment (written off over its life), software, a share of phone and internet, business travel.
- Company: the same business costs, plus the salary it pays you. Private spending run through the company is not a business cost.
General rules of the Income Tax Act, not linked to a primary source here. Ask a registered tax practitioner about your own costs.
Owning assets in the company's name
- A business asset the company owns can be written off against company profit over its useful life.
- Private use is taxed back. A company car you also drive privately is a taxable fringe benefit on your salary.
- The asset belongs to the company, not to you. Getting it out later can trigger tax of its own.
General principles - we have not linked a SARS source for each, so treat them as questions to take to a tax practitioner.
One warning for contractors with one client
If you work for one client, at their office, on their hours, SARS may treat you as an employee for PAYE - and a one-person company in that position can be a "personal service provider" with most deductions blocked.
We did not verify the current personal service provider tests on a SARS page for this post. Check before you restructure.
Sources
- 2026/27 brackets, R17 820 rebate, R99 000 threshold: SARS - Rates of tax for individuals (checked 15 Oct 2026).
- Company tax 27% (years ending 1 Apr 2026 - 31 Mar 2027): SARS - Companies, trusts and SBCs.
- Dividends tax 20%: SARS - Interest and dividends.
- R15 000 company admin cost: our assumption, not a sourced figure. Small business corporation rates are not used.
Education, not financial advice. This post explains how the rules and the arithmetic work. It does not recommend any financial product, and your own situation may differ - speak to a registered financial adviser or tax practitioner before you act. Figures were checked against the linked sources on the date above.