Tax and Compliance
Business Income Tax in South Africa
Business Income Tax
When you run your own business, nobody deducts tax from your income automatically. Money arrives in your account in full, and it is entirely your responsibility to calculate what you owe SARS, set it aside, and pay it on time. Most new business owners underestimate this in their first year and face a bill they are not prepared for. The problem is not usually ignorance of the tax system. It is cash flow mismanagement.
Your Business Structure Determines How You Are Taxed
The first decision that shapes your tax position is whether you operate as a sole proprietor or through a registered company.
If you trade as a sole proprietor, your business income is personal income. It is added to any other income you earn and taxed at your marginal personal rate, which runs from 18% at the lowest bracket to 45% above R1.8 million. There is no separate business tax return. You file an ITR12 individual return.
If you operate through a PTY Ltd, the company is a separate legal entity with its own tax registration. The company pays corporate income tax at 27% of taxable profit. You then pay personal income tax separately on whatever salary you draw from the company, and dividends tax at 20% on any profits distributed to you as a shareholder. These are two distinct obligations and both need to be planned for.
Provisional Tax: The Mechanism Most New Business Owners Get Wrong
Provisional tax is not a separate tax. It is the mechanism SARS uses to collect income tax during the year when you are not an employee subject to PAYE. Instead of one lump sum at year-end, you make two estimated payments per year, roughly every six months.
For individuals and sole proprietors, the first payment is due by the end of August and the second by the end of February. Companies follow the same pattern relative to their financial year-end: first payment six months in, second at year-end.
You must submit an IRP6 return with each payment, even if the calculation results in nil tax payable. Missing a submission is a separate problem from underpaying. SARS can estimate your taxable income and raise an assessment if you do not submit, which triggers penalties on top of whatever you owe.
A third, voluntary payment is available after the February deadline, usually by the end of September. This is worth understanding because it gives you a window to correct an underestimate and reduce interest before SARS finalises your assessment.
The Real Cost of Getting Your Estimate Wrong
This is where new business owners run into serious trouble, and it happens more often than it should.
If your second provisional tax estimate is too low, SARS applies an underestimation penalty of 20% on the shortfall between the tax on your estimate and the tax on your actual income. This is not interest. It is a flat penalty on top of the tax you owe plus interest on late payment.
For taxpayers earning under R1.8 million, you can use your previous year's assessed tax as a safe harbour for your estimate, effectively avoiding the underestimation penalty even if your income has grown. Above R1.8 million, that safe harbour is not available. Your estimate must be within 80% of your actual taxable income or the 20% penalty applies automatically.
A recent proposed change, effective from 25 February 2026, tightens this further: if you submit an estimate within the acceptable tolerance but pay late, the penalty exposure increases. SARS has made clear that it is focused on cash flow, not just accuracy.
Late payment also attracts interest at roughly 10.75% per annum from the due date. Administrative penalties for non-submission range from R250 to R16 000 per month depending on your taxable income level, charged for every month the return is outstanding.
Small Business Corporation Relief
If your PTY Ltd qualifies as a Small Business Corporation, significantly lower tax rates apply instead of the flat 27%. For the 2025/26 tax year, the SBC rates are:
- 0% on the first R95 750 of taxable income
- 7% on income from R95 750 to R365 000
- 21% on income from R365 000 to R550 000
- 27% on income above R550 000
To put this in concrete terms: a company with R500 000 of taxable profit pays roughly R47 000 under SBC rules. The same company paying standard corporate tax at 27% would owe R135 000. That is an R88 000 difference on a single year.
To qualify, all shareholders must be natural persons (no company shareholders), gross income must not exceed R20 million, no shareholder may hold shares in another company (with limited exceptions), and no more than 20% of income may come from investment income or personal services. SBC status is tested annually. A shareholder innocently taking a few shares in another private company can disqualify the entire SBC, so it is worth auditing your shareholder structure before year-end.
SBCs also qualify for accelerated depreciation: 100% in the first year for manufacturing plant and machinery, and a 50/30/20 split over three years for other qualifying assets. If you are buying equipment, the timing of when you bring it into use relative to your financial year-end matters.
Turnover Tax: Worth Knowing About for Very Small Businesses
If your business turns over less than R2.3 million per year, you may qualify for Turnover Tax, which replaces corporate income tax, provisional tax, and capital gains tax with a simplified levy on revenue rather than profit. The rates range from 0% to 3% depending on your turnover level. It is not always the right choice because you pay tax on revenue even if the business made no profit, but it reduces compliance costs significantly and is worth discussing with an accountant if your business is in its early stages.
What to Provision and How
The most practical thing any new business owner can do is treat tax as a fixed cost from day one, not a year-end surprise.
If you are a sole proprietor, set aside 25 to 30% of every payment you receive. Your effective rate will depend on your total income and what deductions you are entitled to, but provisioning conservatively and getting a refund is a much better position than facing a shortfall in February.
If you operate through a PTY Ltd and qualify as an SBC, 15 to 20% is a reasonable starting point on company profits, though you will also need to provision for dividends tax and your own personal income tax on the salary you draw.
Open a separate bank account for tax provisions. This is not accounting advice. It is practical discipline. The money in your operating account feels available for expenses. The moment you treat provisioned tax as accessible working capital, you create a problem that compounds over months.
Common Mistakes Worth Knowing About
Underestimating the second provisional payment. The second payment is the one that attracts the underestimation penalty. Business owners who have had a strong year but submitted a conservative estimate in February because they had not yet closed their books are particularly exposed. If your income has grown materially from the prior year, do not rely on last year's assessment as a guide to what you should be paying.
Not registering for provisional tax from the start. Every business owner and every company is a provisional taxpayer from the first day of trading. There is no grace period. If you have been operating without submitting IRP6 returns, SARS can estimate your income and raise an assessment that is difficult to dispute without proper records.
Mixing personal and business finances. This makes it almost impossible to calculate your actual taxable income accurately, which leads to either overpayment or underestimation penalties. Keep business income and expenses in a dedicated account from day one.
Forgetting that a PTY Ltd has two layers of tax. When you draw a salary from your company, you pay personal income tax on it. When you take a dividend, you pay dividends tax at 20% on the distribution. Many new company directors calculate tax on company profit and forget that extracting that profit as personal income creates a further obligation.
Deducting expenses that are not allowable. Only expenses incurred in the production of income are deductible. Home office expenses, personal vehicle use, and entertainment costs all have specific rules and limits. Overclaiming deductions is one of the most common audit triggers for small businesses.
Ignoring capital gains. If you sell a business asset, a property, or shares, capital gains tax applies. For companies, 80% of the gain is included in taxable income, resulting in an effective rate of 21.6% at the standard corporate rate. This often comes as a surprise because business owners do not think of asset sales as taxable events until the assessment arrives.
The Tax Year and Return Deadlines
The tax year for individuals and sole proprietors runs from 1 March to the end of February. Companies can choose any 12-month financial year-end.
Individuals file an ITR12 annual return during SARS Filing Season, which typically opens in July and closes in late January for provisional taxpayers. Companies file an ITR14 return within 12 months of their financial year-end.
Missing a return deadline costs money. Late submission penalties for companies range from R250 to R16 000 per month depending on taxable income, and they accumulate every month the return remains outstanding.
The Bottom Line
South African business tax is not complicated in principle. You owe tax on your profit, you pay it in advance twice a year based on your best estimate of what that profit will be, and you reconcile at year-end. The problems arise when business owners treat provisional tax payments as optional, underestimate to reduce short-term cash flow pressure, or simply do not provision from the start. Every one of those choices has a penalty attached to it. The cost of getting proper accounting support in your first year is almost always less than the cost of your first underestimation penalty.
Professional advice recommended
This topic involves legal, tax, or regulatory complexity that varies by individual circumstances. The information here is general guidance only. Consult a qualified professional before making decisions specific to your situation.
This article provides general information about South African business law and regulation. It is not legal, tax, or financial advice. Laws and regulations change — verify current requirements with a qualified professional or directly with the relevant authority before making decisions.