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As another tax year draws to a close, it is once again time to reflect on the contributions you have made to retirement structures. It is also an opportune time to learn about the benefits available to you if the above concept is unfamiliar.

Firstly, we will look at how you can use your contributions towards retirement vehicles to reduce your tax liability, by making use of the deduction as contained under Section 11F of the Income Tax Act.

You may deduct up to 27.5% of your gross remuneration or taxable income (whichever is the higher) with respect to your total contributions towards retirement annuities, pension funds and provident funds (subject to an annual limit of R 350 000.00).

The practical aspects of this deduction can be best illustrated by way of an example. In an effort to only highlight the workings of the Section 11F deduction, we will assume that neither of the below individuals are members of a medical scheme or an occupational pension/provident fund:

Person APerson B
Age3030
Gross remuneration500,000.00500,000.00
Less: Contributions to retirement annuities137,500.000.00
Taxable Income362,500.00500,000.00
Tax as per SARS tables79,823.00125,193.00
Less: Rebate14,958.0014,958.00
Tax Payable64,865.00110,235.00

In the above example, we can see that Person A has reduced his tax liability significantly by contributing 27.5% of his gross remuneration/taxable income to a retirement annuity – thereby utilising the full tax benefit available to him.

These deductible contributions are however not limited to voluntary retirement savings, such as retirement annuities, but contributions towards pension/provident funds also qualify. Contributions made by your employer on your behalf form part of your deduction at the end of the year as well.

In most cases concerning members of an occupational retirement scheme (i.e. group retirement annuity, pension/provident fund), the employer would already account for an employee’s Section 11F deduction on contributions, by reducing the amount of PAYE due on a monthly basis.

In such a case, SARS would provide a refund where the employee made separate contributions to a discretionary retirement product in their personal capacity (provided these contributions exceed the employee’s tax liability) – either way, the tax benefit is received, whether by way of a monthly reduction in PAYE or at the end of the financial year as a refund.

For instance; if we assume that Person A’s employer deducted PAYE tax of R 110 235.00 during the year (seeing as they were not aware of his discretionary contributions), then he would be due a refund from SARS to the amount of R 45 370.00 (R 110 235.00 – R 64 865.00).

Should you wish to take advantage of this deduction in the current tax year, please contact your financial advisor before the end of the financial year i.e. 28th of February 2021.

Disclaimer: 

Note that the above should only serve as an example of how the deduction (in terms of Section 11F of the Income Tax Act 58 of 1962) works from a practical perspective and should not be viewed as a guarantee of any particular outcome when submitting a tax return. 

The individuals depicted in the hypothetical scenarios mentioned herein did not have any interest/dividend income for the year, nor did they have medical tax credits due to them, and these (among others) are all factors that would be accounted for in a real tax return. 

This example was intentionally simplified to highlight the tax deduction attributable to retirement savings only. 

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