Salary, Bonus or Dividend? A Tax Question SME Owners Should Think About

When a company has made a good profit, owner-directors often face a familiar question: should the money be taken out as salary, bonus or dividend?

There is no single answer that works for every business.

The tax treatment is different, but tax should also not be the only consideration. The company's cash position, the owner's personal income, future funding requirements and how much profit should remain in the business can all affect the decision.

More importantly, the answer should ideally be considered before year-end, rather than after the financial statements and tax computation have already been prepared.

Salary and bonus reduce company profit — dividend does not

This is the fundamental difference.

Where remuneration is genuinely incurred for the business and satisfies the relevant tax deduction requirements, salary and bonus may generally be deductible expenses of the company.

This means that, subject to the applicable tax rules, paying additional remuneration may reduce the company's taxable income.

The recipient, however, will generally be taxed personally on the employment income received. Bonus and director's fees are also treated as remuneration for tax purposes.

A dividend works differently.

A dividend is a distribution of profit to shareholders. It does not represent an expense incurred by the company in earning its income.

In practical terms:

Salary / bonus

• The company earns profit.
• Salary or bonus is paid to the director.
• Subject to the relevant conditions, the remuneration may reduce the company's taxable income.
• The director is taxed personally on the remuneration received.

Dividend

• The company earns profit.
• The company's tax liability is determined.
• Dividend is distributed from available profits.
• The shareholder's tax position on the dividend is then considered separately.

That distinction alone can produce very different outcomes.

But aren't dividends tax-free in Malaysia?

This used to be a relatively simple statement.

Malaysia operates a single-tier corporate tax system. Historically, dividends distributed under this system were generally exempt in the hands of shareholders because the underlying profits had already been subjected to tax at company level.

However, from the Year of Assessment 2025, individual taxpayers also need to consider the Dividend Tax rules.

For an individual receiving relevant Malaysian dividend income:

• the first RM100,000 of relevant annual dividend income is not subject to Dividend Tax; and
• the amount exceeding RM100,000 is generally subject to 2% Dividend Tax.

For example, if an individual receives RM150,000 of relevant dividend income during the year, the amount exceeding RM100,000 would generally be subject to the 2% Dividend Tax.

This is important because the old assumption that:

Dividend is always tax-free, so just take dividend.

is no longer necessarily correct.

So should an owner take more salary instead?

Not necessarily.

Consider two owner-directors.

Owner A already receives substantial salary from the company.

Owner B receives relatively modest remuneration but takes more of the business profits through dividends.

Increasing remuneration by another RM100,000 may affect them differently because Malaysia's individual income tax system is progressive.

For Owner A, additional salary may fall into a relatively high personal tax bracket.

For Owner B, some additional remuneration may produce a different overall result.

At the same time, paying a dividend does not reduce the company's taxable profit.

The relevant comparison is therefore not simply:

Which one has the lower personal tax?

A better question is:

What is the combined tax and cash-flow impact for the company and the shareholder?

A simple illustration

Assume an SME has profit before owner remuneration of RM500,000, and management is considering extracting another RM100,000.

Option 1 — Pay RM100,000 bonus

Subject to the relevant deductibility conditions:

• Profit before bonus: RM500,000
• Less: Bonus: RM100,000
• Revised profit: RM400,000

The company may obtain a tax deduction, while the director recognises additional employment income.

Option 2 — Pay RM100,000 dividend

The company's profit before dividend remains RM500,000.

The dividend itself does not reduce the company's taxable profit.

The company first determines its tax liability and the dividend is then distributed to the shareholder from available profits.

At shareholder level, the Dividend Tax rules and the individual's total dividend income for the year then need to be considered.

This illustration is deliberately simplified. The actual result can be affected by the company's tax profile, the shareholder's other income and reliefs, dividends received from other companies and other relevant circumstances.

Timing matters too

Imagine a company has performed exceptionally well this year.

Only after the year has ended does the owner ask:

Can we put another RM200,000 bonus to reduce the tax?

By that point, questions may arise regarding when the remuneration was actually approved, when the liability arose, whether it is properly documented and whether it satisfies the relevant tax requirements.

Tax planning generally works better when decisions are made as part of the company's year-end planning process, rather than trying to create the desired tax outcome after the event.

For owner-managed companies, the year-end review may include:

• expected full-year profit;
• remuneration already paid;
• estimated company tax;
• the owner's other taxable income;
• dividends already received during the year;
• cash required by the owner personally; and
• cash the company needs for expansion, financing or working capital.

Sometimes the best answer is a combination

The decision does not always have to be salary or dividend.

Depending on the circumstances, an appropriate combination may provide a better commercial result.

For example, an owner may receive a reasonable level of regular remuneration for the role performed in the company, with additional profits distributed as dividends when the business has sufficient retained earnings and cash.

The appropriate mix can change from year to year.

A company investing heavily in expansion may retain more profits.

A mature cash-generative company may distribute more.

An owner with significant personal cash requirements may have different considerations again.

That is why remuneration planning should not be reduced to a simple comparison of tax rates.

Think about the business before the tax

Tax efficiency matters.

But extracting every available ringgit from a profitable business purely because a particular structure appears tax-efficient may not necessarily be good financial management.

Before declaring a large dividend or bonus, management should also ask:

How much cash does the business actually need over the next 12 months?

A company may be profitable but still require significant cash for:

• inventory;
• new equipment;
• loan repayments;
• expansion;
• tax instalments;
• staff costs; or
• unexpected working-capital requirements.

The lowest-tax option is not always the best business decision.

What SME owners should consider before year-end

Rather than deciding on salary, bonus and dividends separately, owner-managed companies may benefit from looking at them together.

A useful year-end review could consider:

1. the company's expected taxable profit;
2. remuneration already received by the owner;
3. the owner's estimated personal tax position;
4. dividends already received during the year;
5. the company's retained earnings and distributable profits;
6. available cash and future working-capital requirements; and
7. whether the proposed remuneration or distribution has been appropriately documented and approved.

The objective should not simply be to pay the least tax possible.

It should be to arrive at a structure that is commercially sensible, properly supported and tax-efficient within the applicable rules.

The key takeaway

For many SME owners, salary, bonus and dividend may simply appear to be different ways of getting money out of their company.

From a tax perspective, however, they are not interchangeable.

Salary and bonus may affect both company taxable income and the individual's personal tax position.

Dividend generally does not reduce company taxable income, while individual shareholders may also need to consider the Dividend Tax rules.

The right answer therefore depends on both sides of the equation:

the company and the shareholder.

For profitable owner-managed businesses, that makes remuneration and dividend planning something worth considering before the financial year closes — rather than after the tax computation is already on the table.

Sources & references

Inland Revenue Board of Malaysia (HASiL)

Income Tax Act 1967