How is a restraint of trade payment taxed in South Africa?
A restraint of trade payment made to a natural person is taxed in full as ordinary income, not as a lighter capital receipt. Paragraph (cB) of the "gross income" definition in section 1 of the Income Tax Act brings any amount you receive as consideration for a restraint of trade into gross income. Because it counts as remuneration, the payer withholds PAYE, and the amount is taxed at your marginal rate on the normal individual table, with rates rising to 45%.
What a restraint of trade payment is
A restraint of trade payment is money paid to you in exchange for agreeing not to compete, not to solicit clients, or otherwise to limit your future economic activity for a period. It often appears when you leave an employer, or when you sell a business and agree to stay out of that market.
For many years the common-law position treated such a payment as capital, on the reasoning that you were giving up part of your income-earning structure. Paragraph (cB) changed that for natural persons. The Act now brings the payment into the income net, and the old capital argument no longer holds for you as an individual.
Why the income treatment matters
The split between income and capital is not a technicality. It decides how much tax you actually pay.
If a restraint payment were a capital gain, only part of it would ever reach your taxable income. Individuals get an annual exclusion of R40,000, and only 40% of the remaining gain is included, which gives a maximum effective rate of 18%.
Paragraph (cB) takes that treatment away. The payment sits alongside your salary and other income, and it is taxed on the same sliding scale, up to 45%. An 18% effective ceiling set against a 45% marginal rate is a wide gap, and that gap is the reason the classification is worth checking before you sign anything.
How the tax is collected
Because the payment is remuneration, the payer deducts PAYE when the amount is paid, in the same way tax is withheld on your salary. There is no separate lump-sum table for a restraint of trade payment. That marks it out from a severance or retrenchment benefit, which is taxed on its own special table. A restraint payment goes onto the normal individual table for the year, and nowhere else.
One consequence follows from this. Since the amount is added to whatever else you earn, it can push part of your income into a higher bracket for the year in which it is paid.
Worked example
Assume you leave an employer and receive a restraint of trade payment of R400,000. Assume you have no other income for that year of assessment.
The amount is taxed as income on the normal table. R400,000 falls in the R370,501 to R512,800 bracket, so:
- Base tax for the bracket: R77,362
- Plus 31% of the amount above R370,500: 400,000 - 370,500 = 29,500
- 31% of 29,500 = R9,145
- Tax before rebate: 77,362 + 9,145 = R86,507
- Less the primary rebate: 86,507 - 17,235 = R69,272 for the year
The payer withholds PAYE on the payment.
Now compare the capital treatment that some people wrongly expect. Had the same R400,000 been a capital gain, you would first subtract the R40,000 annual exclusion, leaving R360,000. Only 40% of that enters taxable income: 40% of 360,000 = R144,000. Adding R400,000 to income is a far heavier outcome than adding R144,000, and that difference is what paragraph (cB) settles.
Frequently asked questions
Is a restraint of trade payment taxed as income or as capital in South Africa?
For a natural person it is taxed as income. Paragraph (cB) of the gross income definition in section 1 includes any amount received as consideration for a restraint of trade, which overrides the older common-law view that treated it as a capital receipt.
Does PAYE get withheld on a restraint of trade payment?
Yes. The payment is remuneration, so the payer deducts PAYE when it pays the amount, just as it would on your salary. You are not left to settle the full liability only at assessment.
Is there a special tax table for restraint of trade payments?
No. Unlike a retrenchment or severance benefit, a restraint payment has no separate lump-sum table. It is taxed on the ordinary individual table at your marginal rate, which can reach 45%.
Can a restraint payment push me into a higher tax bracket?
Yes. Because it is added to your other income for the year, a large restraint payment can move part of your income into a higher bracket for that year of assessment.
Why do people think it should be a capital gain?
Under the old common law, giving up the right to compete looked like parting with a capital asset. Paragraph (cB) was written specifically to place these payments in the income net for natural persons, so the capital argument no longer applies to you as an individual.
Where to go next
To see how another once-off amount lands on your normal table, read our guide on how a bonus is taxed in South Africa, then run your own figures through the income tax calculator.
For related situations, see how a retrenchment package is taxed and whether overtime is taxed more in South Africa.
SARS sources:
Try it on your own numbers
TaxRationale runs this computation for your exact situation, free, on your own device. No account needed.
Try it free