If you own a limited company, the profit belongs to the company until you take it out. You can pay yourself a salary, a dividend, or both. They are taxed differently, and the best mix depends on your profit and your other income.

Salary

A salary is a cost of the company, so it reduces the company's taxable profit. For you, it is employment income taxed through PAYE, with NSSF, SHIF and the Housing Levy on top. Payroll rules apply: see how to run payroll for a small business. Salary to directors is deductible if it is reasonable for the work done.

Dividends

A dividend is a distribution of profit after tax. The company has already paid corporation tax at 30%, and it is not deductible for the company. When a resident individual receives a dividend, a final withholding tax of 5% applies. A non-resident shareholder is normally subject to 15%. The company must withhold and pay the tax to KRA by the 20th of the following month; see withholding tax in Kenya explained. The dividend and interest tax calculator works out the tax and the net dividend.

Comparing the two with an example

The company makes KES 1,000,000 profit before paying the owner.

Option A: all as dividend. Corporation tax at 30% is KES 300,000, leaving KES 700,000. Withholding at 5% is KES 35,000, so the owner receives KES 665,000. Total tax is KES 335,000, or 33.5%.

Option B: a salary of KES 400,000 a year and the rest as dividend. The salary is a cost, so profit falls to KES 600,000 and company tax is KES 180,000, leaving KES 420,000. Dividend tax at 5% is KES 21,000. PAYE on a salary of about KES 33,000 a month is only about KES 18,000 a year after relief, so total tax is roughly KES 219,000 against KES 335,000, plus NSSF, SHIF and Housing Levy contributions on the salary. The mix that costs least depends on the amounts, so test it.

The sole trader versus company calculator compares structures, and the corporation tax computation workbook works out the company's tax.

Practical points

  • Dividends need profits. A company can pay a dividend only from available profits, with a board resolution. Keep the minutes.
  • A regular salary gives you NSSF and SHIF contributions and a payslip, which helps when you apply for loans.
  • Do not simply withdraw cash. Money taken from a company without a salary or dividend is a director's loan, which has its own rules, and it can be treated as a distribution.
  • Record everything in the accounts and the payroll.

Sole traders

If you are a sole trader, you do not pay yourself a salary: what you take out are drawings, not an expense, and the profit is taxed whether or not you take it. See separating business and personal money and the owner drawings and capital account tracker.

Dividends from shares and funds

Investment income such as dividends, bank interest and money market fund interest is taxed by withholding at set rates, and the tax is usually final. See the dividend and interest calculator for each case.

Plan ahead

Decide your mix before the year end, not after. Add the figures to your budget; see budgeting for a small business and sole trader or limited company.

Tax rules change and individual circumstances differ. Ask a registered tax adviser before you decide.