Entrepreneurs and business owners face numerous decisions in managing their businesses, and one of the most critical is determining how to compensate themselves. Should you pay yourself a salary, dividends, or a mix of both?

The choice isn’t just about how much you earn but also about the tax implications, long-term financial planning, and the overall health of your business. Particularly in Malaysia, where tax laws are evolving, including a 2 per cent tax on dividend income exceeding RM100,000 starting next year in 2025, this decision has gained even greater significance as outlined during the Budget 2025 by the Prime Minister Datuk Seri Anwar Ibrahim.

This comprehensive guide will walk you through the pros and cons of each approach, real-life scenarios, tax implications, and actionable advice for Malaysian business owners. By the end, you’ll be equipped to make an informed choice that aligns with your business’s profitability and your financial goals.

Quick Overview: Key Differences

What is a Salary?

A salary is a fixed, regular payment received as an employee or director of a company.

Subject to Malaysia’s personal income tax rates and requires deductions for EPF, SOCSO, and possibly EIS.

Considered a business expense, reducing the company’s taxable income.

What are Dividends?

Dividends are distributions of company profits to shareholders.

Not paid regularly and are not considered a business expense.

Subject to corporate tax on company profits before distribution, then taxed as personal income for recipients.

Starting in 2025, annual dividend income exceeding RM100,000 will incur an additional 2% tax.

Key Differences:

Predictability: Salaries provide consistent income, while dividends depend on company profits.

Tax Treatment: Salaries are subject to personal income tax and deductions; dividends often have a lower effective tax rate but are impacted by corporate taxes.

Business Impact: Salaries reduce taxable income for the business; dividends are distributed from after-tax profits.

Understanding Salary vs. Dividends

Before diving into which option is better, it’s essential to understand what salaries and dividends mean in the context of business ownership.

What is a Salary?

A salary is a fixed, regular payment you receive from your company as an employee or director. Salaries are subject to Malaysia’s personal income tax rates and require deductions for Employees Provident Fund (EPF), SOCSO, and possibly EIS (Employment Insurance System).

For example, if you decide to pay yourself a monthly salary of RM8,000, you’ll need to deduct contributions and withhold taxes, just as you would for any other employee in your company. This amount is considered a business expense, reducing your company’s taxable income.

What are Dividends?

Dividends, on the other hand, are distributions of your company’s profits to shareholders. Unlike salaries, dividends are not paid regularly and are not considered a business expense. Your company must pay corporate tax on its profits before issuing dividends, which are then taxed as personal income.

For instance, if your company declares RM100,000 in dividends, you’ll receive your share (based on your ownership percentage) after corporate taxes have been applied. Starting in 2025, if your total annual dividend income exceeds RM100,000, an additional 2% tax will apply.

Benefits of Paying Yourself a Salary

Choosing a salary has many benefits, especially for business owners who want to be stable with their money and plan for retirement. Let’s look at some of these benefits closely. First, a salary provides a steady income. This steady income makes it easier to handle personal finances, get loans, and plan for later.

Also, salary payments help with contributions to the EPF, which is important for long-term financial security. It gives a safety net for retirement and any possible health issues. For people with a salary, these contributions are required. This helps in saving money regularly, making people feel more responsible about their finances.

Predictability

One of the most significant benefits of a salary is its predictability. Business owners can count on a consistent monthly income to manage personal expenses, household budgets, and financial planning. Unlike dividends, which fluctuate based on profits, salaries provide stability regardless of the company’s performance.

Predictable income is especially critical for business owners who need to support dependents, meet loan repayments, or save for future goals. It eliminates the uncertainty associated with profit-based distributions like dividends.

Tax-deductible expense

Paying a salary qualifies as a tax-deductible expense for the business. This means the company can lower its taxable income by accounting for salaries as operational costs. For example, if a business generates RM500,000 in revenue and pays the owner a salary of RM100,000, only RM400,000 is subject to corporate tax.

This dual benefit—consistent income for the owner and reduced tax liability for the company—makes salaries a practical choice for many entrepreneurs.

Retirement and Benefits Eligibility

Receiving a salary opens the door to employment-related benefits. In Malaysia, this includes EPF contributions, SOCSO, and other benefits like health insurance provided through payroll. Over time, these contributions can grow into significant savings for retirement or offer protection in case of medical emergencies.

For business owners, access to such benefits ensures long-term financial security, something that dividends alone cannot provide.

Consistent Financial Responsibility

When business owners pay themselves a salary, it simplifies accounting and reporting processes. Salaries are recorded as regular payroll expenses, making it easier to track, report, and audit. This is particularly beneficial for compliance with tax authorities and maintaining transparent financial records.

While the benefits of paying a salary are clear, it is essential to weigh these against the drawbacks, particularly the impact on personal taxes and cash flow.

Benefits of Paying Yourself Dividends

Even with the new dividend tax in Malaysia, using dividends to pay people still has some benefits. Dividends can be flexible and may help save on taxes, depending on a person’s financial situation.

Unlike a regular salary, dividend payments can change based on how much money the company makes. This gives some room for financial choices. Also, in some cases, dividends can lead to paying less tax compared to regular salaries. This depends on things like how much profit the company makes and the tax rate for the individual.

Lower Tax Rate

In Kuala Lumpur, Malaysia, the new dividend tax has changed things a bit for individual shareholders. Still, dividends can keep a lower tax rate than salaries in some cases. This new tax, applicable to individual shareholders with annual taxable dividend income exceeding RM100,000, starts in 2025 and charges a 2% tax on dividend income over RM100,000 each year.

There are many exemptions and deductions that can make dividends a good tax option. For example, dividend income from the profits of companies, Employees Provident Fund (EPF), Amanah Saham Nasional Bumiputera (ASNB), Lembaga Tabung Angkatan Tentera (LTAT), unit trusts, and foreign dividend income is still tax-exempt.

Also, the corporate tax rate, which hits a company’s profits before paying dividends, is often lower than the individual income tax rate. This is especially true for those with higher income taxes. It is important to carefully think about your financial situation. You should also talk to a tax expert to see if dividends are still the best option for saving on taxes.

Flexibility

Unlike salaries, which are fixed and regular, dividends offer flexibility. Business owners can decide when to distribute dividends based on the company’s financial performance and cash reserves. For example, dividends can be distributed during profitable quarters while being withheld during lean periods.

This flexibility allows business owners to align payouts with their personal financial needs and the business’s operational requirements.

No Mandatory Contributions

Unlike salaries, dividends do not require deductions for EPF, SOCSO, or other employment-related contributions. This can lead to cost savings for the business, as payroll taxes and related costs are avoided. For business owners seeking to minimise operational expenses, dividends provide a viable alternative.

However, it is important to plan finances well. This way, people can prepare for retirement and other long-term financial goals.

This kind of savings method also allows for better control over your investment choices. You don’t have to put money into certain funds. That way, you can look into other investment options that fit your goals and how much risk you want to take. This can help you get better returns and spread out your investments.

Reduced Impact on Cash Flow

Since dividends are distributed only when the business is profitable, they minimise strain on cash flow during low-revenue periods. This ensures that the company retains sufficient resources for operational expenses, reinvestments, and growth initiatives.

Business may require this cash for things like covering operational costs, buying new equipment, or making smart purchases. This can help the company grow and make more profits over time.

But, it’s important to remember that while dividends can help with short-term cash flow, businesses must also plan for the long term. To keep paying dividends, companies need to make a profit consistently. They should focus on making enough profits to pay for their expenses, debts, and dividend payments to shareholders.

Downsides of Salary vs. Dividends

Downsides of Paying a Salary

Higher Tax Burden: Salaries are taxed as personal income under Malaysia’s progressive tax system. For high earners, this can result in a higher tax obligation compared to dividends.

Impact on Cash Flow: Salaries must be paid consistently, regardless of the company’s profitability. This can place a strain on the business during financially challenging periods.

Downsides of Paying Dividends

Profit Dependency: Dividends rely entirely on the company’s profits. During lean periods, this could mean no income for the owner.

Limited Benefits: Dividends do not qualify for employment-related benefits like EPF or SOCSO. Over time, this could impact long-term savings and financial security.

Regulatory Changes: Starting in 2025, a 2% tax on dividend income exceeding RM100,000 adds to the costs of drawing dividends for high-earning business owners.

These downsides highlight the importance of carefully evaluating your business’s financial health and understanding the implications of each option.

Factors to Consider When Choosing Salary or Dividends

When you choose between a salary and dividends for your pay, many things need thought. Look at your finances. Consider how much money you want, your tax bracket, and your long-term money goals.

Next, check how well your company is doing. Look at profit, cash flow, and plans for growth. Finding the best way to pay yourself can save on taxes. A careful review of your situation, often with help from a financial advisor, will help you make the best choice.

Personal Tax Bracket

One key factor that affects your choice between salary and dividends is your personal tax bracket. In Malaysia, the income tax system is progressive. This means that those who earn more pay higher tax rates. If you are in a higher tax bracket, getting some of your income as dividends could look good. That means high-income earners may benefit more from the lower tax rates associated with dividends, while those in lower tax brackets might find a salary more advantageous.

However, remember that there are different exemptions and deductions for dividend income. Money from sources such as EPF, ASNB, LTAT, and unit trusts does not get taxed under this new rule. This could change your calculations. It is important to check if these exemptions apply to your dividend income and how they will affect your total tax bill.

So, you need to calculate your tax bill in both cases – salary and dividends. You should consider your tax bracket, any deductions, and exemptions that apply to you. Talking to a tax expert can help you make smart choices. This way, you can save the most on your taxes and manage your obligations well.

Company Profitability

Consistent profitability allows for regular dividend payments, making them a viable option for business owners. Dividends are tied directly to the surplus income of the company, so if your business generates steady profits, you can benefit from this approach without significantly impacting operational funds. Additionally, dividends often attract a lower tax rate than salaries, providing a tax-efficient way to draw income from your company.

However, businesses with fluctuating or seasonal revenues may find dividends less reliable. During low-profit periods, there may not be enough surplus to pay dividends, leaving you without a steady income. In such cases, a salary offers predictability, ensuring regular monthly income to meet personal financial needs while maintaining stability. By assessing your company’s profitability trends, you can choose the best approach or even combine both methods for greater flexibility.

Long-term Financial Goals

Aligning how you get paid with your long-term money goals is important. It helps you be financially secure and reach your dreams. If planning for retirement is a top priority, a regular salary might be a better choice. Having salary payments means you can consistently put money into your EPF. This helps grow your retirement savings and can include extra money from your employer.

People with salaries often have access to many types of insurance and financial products for retirement. These can include retirement annuity plans or investment-linked insurance. These products can provide tax benefits and chances to invest for a strong retirement fund.

On the other hand, if you want more freedom and control over your investments, getting dividends might be better for you. This way, you can choose to put more money into different investments based on your comfort with risk and your financial goals. You aren’t stuck with just one retirement fund.

Regulatory Requirements

Navigating the rules about salaries and dividends is important. This helps you follow the law and get the most financial benefits. For example, Malaysia has tax laws that explain how much tax you pay on salaries and dividends. This includes tax rates, exemptions, and deductions.

While Malaysian tax laws generally favor salaries, it’s crucial to consult with a tax professional to understand any specific regulations or incentives that may apply to your business structure and financial situation. This ensures you meet all legal requirements while also lowering your tax burden and using available benefits and allowances.

Common Scenarios and Recommendations

It can be confusing to decide between taking a salary or dividends. Knowing common situations and general tips can help. But remember, every business owner has a unique situation. There is no single solution that works for everyone.

The examples below can give general advice, but you should adjust them based on your own situation after checking your personal and business finances. It’s a good idea to talk to a financial advisor or tax expert to get advice that fits your needs.

For Sole Proprietors or Small Business Owners

For sole proprietors or small business owners, managing cash flow effectively is often a critical challenge. When profits are inconsistent or cash flow is tight, paying yourself a salary ensures financial stability. A salary provides a predictable monthly income, allowing you to manage personal expenses without being overly reliant on the business’s performance. This consistency can also help when seeking personal loans or mortgages, as it demonstrates a stable income stream to financial institutions.

Additionally, a salary can simplify financial planning for the business. By treating your income as a fixed expense, it becomes easier to track and allocate resources for operational costs and future investments. This approach also enables the business to retain profits for reinvestment, laying a stronger foundation for future growth. Sole proprietors often benefit from this predictability, especially in the early stages when revenue fluctuations are common.

For Established Business Owners with Higher Profits

For business owners with well-established companies generating significant profits, dividends become an attractive option due to their tax efficiency. In many cases, dividends are taxed at a lower rate than salaries, which can lead to considerable savings, particularly for higher-income earners. By leveraging dividends, you can enjoy the fruits of your business’s success while minimising your overall tax liability.

However, it’s essential to strike a balance between personal income and business needs. Retaining sufficient capital within the company is crucial to cover operational expenses and support future growth. Overextending by paying excessive dividends can strain cash flow and leave the business vulnerable to unexpected challenges. A careful assessment of your company’s financial health, paired with expert tax planning, can help you determine the optimal dividend amount while safeguarding the company’s sustainability.

For Businesses in Growth Phases

For businesses undergoing rapid growth or expansion, reinvesting profits is often the top priority. During this phase, allocating funds toward marketing, product development, or scaling operations can deliver higher returns than drawing substantial income. In such scenarios, opting for a minimal salary to cover your living expenses allows you to maintain personal financial stability while directing resources toward long-term growth.

This approach also demonstrates discipline and commitment to stakeholders, such as investors or lenders, who may view reinvestment as a sign of a forward-thinking, growth-focused business strategy. By keeping your income modest during this critical phase, you position your business for greater profitability in the future, which could eventually enable larger dividends or salary increases. Balancing personal needs with business priorities is key to achieving sustainable success during periods of expansion.

Conclusion

The decision to pay yourself a salary or dividends depends on a variety of factors, including your personal financial goals, your company’s financial health, and the prevailing tax regulations. It’s essential to carefully weigh the pros and cons of each approach and consider your specific circumstances.

To make an informed decision, consult with a qualified accountant or tax advisor who can provide tailored advice based on your unique situation. By understanding the implications and making a strategic choice, you can optimise your income and ensure the long-term success of your business.

Consult with Grof

If you’re still unsure about the best way to pay yourself, reach out to us at Grof. Our team of experienced professionals can provide expert guidance on accounting strategies, tax planning, and personalised financial advice tailored to your business needs.

Remember: Your financial future is important. Make informed decisions and seek professional advice to achieve long-term success.