by Ryno Crous
With another tax year drawing to a close, it is once again time to review your retirement contributions for the year, and whether you are using the full tax benefits available to you.
As part of the government’s retirement-reform initiative, new legislation incentivising investors to contribute to retirement structures was introduced in March 2016. Every individual can contribute up to 27.5% (limited to a maximum of R 350,000.00 p.a.) of their taxable income/gross remuneration to retirement structures and claim the tax back as a deduction at the end of the tax year.
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 are taxable as a fringe benefit in your hands, but these contributions also form part of your deduction at the end of the year.
The below scenarios illustrate the significant tax benefit granted to an individual contributing 27.5% of their income towards retirement structures vs. the same individual contributing 0%:
Scenario.1: Mr Doe
Salary: R 500,000.00
Retirement contribution: R 0.00.
Taxable income: R 500,000.00.
Final tax payable for the year: R 97,225.00 + 36% x (R 500,000.00 – R 410,460.00)
= R 129,459.40 – R 13,635.00 (primary rebate) = R 115,824.40.
Scenario.2: Mr Doe
Salary: R 500,000.00
Retirement contribution: R 500,000.00 x 27.5% = R 137,500.00.
Taxable income: R 500,000.00 – R 137,500.00 = R 362,500.00.
Final tax payable for the year: R 61,910.00 + 31% x (R 362,500.00 – R 296,540.00)
= R 82,357.60 – R 13,635.00 (primary rebate) = R 68,722.60.
By taking advantage of the tax deduction, Mr Doe is effectively placed into a lower tax bracket and saves R 47,101.80 in annual taxes. If we look at this example from a different perspective, by saving R 47,101.80 in taxes, SARS has effectively paid nearly 35% of Mr Doe’s retirement contributions for the year.
It is common payroll practice that you will receive your tax deduction for contributions towards pension/provident funds (employer/employee contributions) immediately at the end of each month. The deduction attributable to voluntary retirement savings (i.e. retirement annuities) is utilized/declared at the end of the relevant tax year.
It is also important to note that even if the annual contribution limit is exceeded, your tax deduction does not get lost, but gets carried over to the next tax year and will be available for deduction then.
Should you wish to take advantage of the tax deduction in the current tax year, please contact your financial advisor before the end of the financial year i.e. 28th of February 2019.