Sole Proprietor Tax Rate in Malaysia: How to Reduce Income Tax
- Chow Ping
- 2 days ago
- 5 min read
As a Sole Proprietor in Malaysia, every Ringgit you earn goes straight onto your personal income tax bill.
There's no clever accounting trick to avoid this. No separate "company profits" that sit safely in a corporate account.
Your business makes RM10,000? That's RM10,000 added to your personal income.
Your business makes RM500,000? Congratulations, you're now in the highest tax brackets.
The more successful your business becomes, the more LHDN takes.
Fortunately, there are legal, proven ways to reduce your tax burden as a Sole Proprietor in Malaysia.
Today, we'll talk about...
• what a Sole Proprietorship is, how the tax rates work
• three strategies to keep more of your money
What is a Sole Proprietorship?
Think of a Sole Proprietorship like wearing a mask.
You're still YOU running the business, just under a different name.
There's no separation between you and your business. You ARE the business.
This means:
All your business profit = your personal income
Higher profits push you into higher tax brackets
You pay tax on everything (even money you put back into the business)
You're personally responsible if something goes wrong
Business debts become your personal debts
The good part?
Simple setup and low compliance costs
Lower tax burden when profits are small
You keep full control (no shareholders, no board meetings)
Minimal paperwork compared to a Sdn Bhd
A Sole Proprietorship is perfect if you're just starting out, testing a business idea, or running a low-risk service business like consulting or freelancing.
But as your income grows, so does your tax bill. Until a point where it makes more sense to incorporate as a Sdn Bhd. More on that later.
Right now, let's talk about how sole proprietor tax rates work in Malaysia works.
How Sole Proprietor Tax Rates Work in Malaysia
As a Sole Proprietor, you file Form B with LHDN (not the regular Form BE that salaried employees use).
The deadline is June 30 every year.
Here are the personal income tax rates that apply to your business profits:
Look at those rates above RM100,000.
Once you cross RM100,000, LHDN starts taking a much much much much muccchhh bigger bite.
Fortunately, LHDN is 100% a monster, because you don't pay the highest rate on ALL your income.
Malaysia uses marginal tax rates, which means your income is taxed progressively across multiple brackets.
Let’s say you run a successful cat massage business.
The cats love you. They all leave 5 start reviews on your page. As a result, business blooms.
You make RM200,000 in chargeable income.
However, you don’t pay 24% on the entire RM200,000, which would be RM48,000 (OUCH).
What does happen is this:
First RM5,000: 0% = RM0
Next RM15,000: 1% = RM150
Next RM15,000: 3% = RM450
Next RM15,000: 8% = RM1,200
Next RM20,000: 13% = RM2,600
Next RM30,000: 21% = RM6,300
Final RM100,000: 24% = RM24,000
Total final tax: RM 34,700
It’s money, but less painful than RM48,000.
Now let's talk about how to reduce that tax bill even further.
3 Ways to Reduce Your Sole Proprietor Tax
1. Claim Every Legitimate Business Expense
This is the foundation.
Every legitimate business expense you claim reduces your taxable income.
What qualifies:
Employee salaries
Insurance premiums
Office supplies and equipment
Office rent or home office deduction
Professional fees (accountant, lawyer)
Travel expenses for business purposes
Utilities (electricity, water, internet, phone)
Marketing costs (ads, website, business cards)
Software subscriptions (ClickUp, Canva, ChatGPT Plus)
The golden rule: Keep your receipts.
2. Maximize Personal Tax Reliefs
Even as a business owner, you're entitled to standard personal tax reliefs.
These stack on top of your business expense deductions.
The big ones:
Spouse relief: RM4,000
Individual relief: RM9,000
Child relief: RM2,000 per child
Life insurance/EPF: Up to RM7,000
Lifestyle purchases: Up to RM2,500
Education fees (self): Up to RM7,000
Medical expenses (parents): Up to RM8,000
If you're in the 24% bracket, a RM10,000 relief saves you RM2,400 in actual tax.
Make sure you claim all of these.
3. Convert to Sdn Bhd when the time is right
Here's where things get interesting.
At a certain income level, staying as a Sole Proprietor means you're being too generous with LHDN.
The Fundamental Difference
As a Sdn Bhd:
Your company pays tax separately (17% on first RM600,000)
You only pay personal tax on salary + dividends you take out
You control withdrawals = you control your personal tax
Your personal assets are protected (limited liability)
But Sdn Bhd comes with costs:
Audit fees: RM2,000-5,000 yearly
Company secretary: RM600-1,200 yearly
Monthly accounting: RM6,000-24,000 yearly
So is it worth it?
Depends on your income.
Consider these two scenarios.
Scenario 1: Sarah the Freelancer (RM 80k yearly profit)
Sarah is a freelancer who makes RM80k profit yearly from her design business.
As a sole proprietor, she pays around RM3k in personal tax.
If she switches to Sdn Bhd?
The company pays RM12k tax (15%).
Plus audit fees, secretary fees, accounting costs... She's actually paying MORE.
Scenario 2: Adam the e-comm king (RM 500k yearly profit)
Adam has an online store that makes RM500k profit.
As sole proprietor, he pays a crazy RM140k+ in personal tax (ouch!).
Switch to Sdn Bhd? Company pays RM85k.
He takes RM200k salary, pays RM26k personal tax.
Total: RM111k.
That's RM29k saved!
(Plus, he sleeps better knowing his house won't disappear if someone sues the business.)
Having said that, Sdn Bhd comes with other costs — the reason Sarah the freelancer would pay MORE money if she registers as a Sdn Bhd.
• Audit fees (RM2k-5k yearly)
• Company secretary (RM600-1.2k)
• Monthly accounting (RM500-2k monthly)
Your cheatsheet
If you're making under RM150,000: Stay as Sole Proprietor. Keep it simple.
If you're making RM150,000-250,000: Run the numbers for your situation. Consider non-tax factors like asset protection.
If you're making RM250,000+: Seriously evaluate Sdn Bhd. You're likely paying too much tax.
If you're making RM500,000+: Convert already. You're being too generous with LHDN.
Conclusion
As a Sole Proprietor in Malaysia, your business profit equals your personal income.
You're taxed using progressive marginal rates, which is better than flat rates but still painful at higher income levels.
And remember: at a certain income level (usually RM250,000+), converting to Sdn Bhd stops being a question and becomes common sense.
The key is knowing when you've reached that tipping point.
At Douglas Loh & Associates, we help Sole Proprietors optimize their taxes and make smart decisions about business structure.
And when it's time to register as a Sdn Bhd, we manage the entire conversion from start to finish.
Want to focus on your business while we manage the boring paperwork for you?
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