It’s around this time every year that those who would like to reduce their tax liability to the South African Revenue Service (SARS) as well as save towards their retirement, start doing calculations and chatting to their financial planners.
National Treasury has done well over the years to encourage South Africans to save by introducing new tax incentives on various products. Contributions towards retirement annuities (RAs) and pension funds can be used (up to a certain limit) to reduce your tax liability to SARS. Moreover, proposed tax changes as well as the introduction of the tax-free investments bring even more incentives to ‘top-up’ your contributions towards your retirement fund and tax-free investments.
Towards the end of every tax year, RA members are reminded to reduce their tax liabilities by maximising their RA contributions to ensure that they use the full tax contribution deduction that they are entitled to. Currently, one is entitled to deduct up to 15% of your net non-retirement funded income from your taxable income. In essence it means that a business person who earns R1 000 000 a year and is not a member of a pension fund or provident fund can reduce their taxable income by up to R150 000. Assuming a tax rate of 41%, that is a tax rebate of R61 500 at the end of the tax year. R61 500 that would otherwise be sitting with SARS can now be used to pay for your annual car payments or groceries or any other expenses you may have. It is for this reason that many RA members start ‘topping up’ their RA contributions.
The end of this tax year also brings to an end the way we calculate your contribution tax deduction. As of 1 March 2016 the new tax deduction will be 27.5% (see diagram below) of the higher of taxable income or remuneration of any RA, provident and pension fund contribution. While the new tax deduction calculation will result in an increase for the majority of South Africans, as of 1 March 2016 the tax deduction that you will be entitled to will be capped at R350 000. This will affect those RA members who contribute more than R350 000 per tax year (or R29 167. 66 per month) and earn more than R1 270 000). The current year is therefore the last opportunity for those RA members who qualify for and therefore want to contribute more than R350 000 to their RAs. All contributions you want to make for the current tax year must be done by the 29 February 2016, as any contributions thereafter will be subject to the 2016/2017 tax year.
In 2015, Treasury also introduced tax-free investments which allowed an investor to contribute up to a maximum of R30 000 to an investment where the returns are not subject to tax. The contribution limit applies to each tax year and on 29 February 2016; it will be your last opportunity to get your maximum contribution in for the 2015/2016 tax year.
Treasury has provided South Africans with various tax incentives in an effort to encourage saving. And, with the help of a financial planner, it is important to understand these incentives and use them in a way that is tax-efficient and puts you in a position to ultimately save well.