SA's No 1 Insurance Blog

Hands up if you love paying tax, especially after the Bosasa scandal?

There is a way to pay as little as possible legally, but you’re going to have to act quickly.

How do you pay as little tax as possible?

The answer lies in retirement funds, and specifically retirement annuity funds.

Without making this too complicated:

  • you can invest up to 27,5% of your annual taxable income (excluding any capital gain) towards retirement.
  • This 27,5% amount is limited to R350,000 ever year
  • This can be invested into your pension or provident fund or your retirement annuity

What does time have to do with it?

The last day of February is the end of our tax year.

If you haven’t already invested the allowed deductible amount, then you can invest a lump sum before the 28th of February. And to be safe, do this at least a week before then.

“But that doesn’t apply to me because I already invest monthly into my retirement annuity.”

If you are already investing the correct amount, then you can ignore this article. But for those of us who didn’t do the calculation in advance, and who got the sum wrong, you have one last chance to get it right, so keep reading!

What you need to do is this

First off, contact your financial advisor. They will offer the correct financial advice and hopefully assist with the tax calculation.

Secondly, contact the investment company handling your retirement annuity and ask for their cut-off times and date. You don’t want to make the deposit one day too late.

Third, ask your human resources department for a proforma IRP5 certificate reflecting your income as at the end of February 2019.

If they can’t help, then do it yourself. Take all your payslips and tally up your taxable income for the year. Then add on the months of January and February. This should give you your annual taxable income.

But be careful here since you might have other forms of income which are also taxable such as rental income. Your 27,50% calculation needs to include these other incomes.

Now take your taxable income and work out what 27,50% of that is. Here is a silly calculator to help you with that (Just enter your annual taxable income in the green block).

Once you have that amount, deduct from it your existing annual contributions to pension, provident, and retirement annuity funds up until the end of February 2019.

Is there an amount left over?

If the answer is yes, then this is what you can still invest as a lump sum into your retirement annuity to get the maximum tax deduction.

What difference will it make?

Look at it this way.

  • Let’s say your taxable income is R310,000 a year
  • Your marginal tax rate on that sort of income is 31% (2018 tax year)
  • Now let’s reduce that income by the amount which qualifies for the retirement fund deduction. Let’s imagine that your annual contribution is R20,000
  • Your taxable income drops from R310,000 to R290,000 because of that
  • Your marginal tax rate also drops from 31% to 26% – your first big saving because you’re being taxed in a lower band. Some won’t be as lucky and will remain in their existing band.
  • R20,000 x 26% = R5,200 paid by the taxman
  • The balance of R14,800 is paid by you.

But what if you could contribute R30,000 instead?

  • Your annual taxable income drops from R310,000 to R280,000. This still leaves you in the 26% marginal tax bracket
  • R30,000 x 26% = R7,800 paid by the taxman instead of the R5,200 in the example above.

Can you see why you’d want to top up your retirement annuity?

For most of us, income tax isn’t optional, especially if you’re an employee. One of the few ways to get some of that tax money back is through your retirement fund.

Remember the example above.

If you’ve got the R10,000 lying around, why not invest it into a retirement annuity? Who knows, it might just be enough to lower your income tax bracket from 45% to 41%, or from 36% to 31%, or from 26% to 18%?

Two takeaways in this article…

  1. Contributing a lump sum to your retirement annuity could lower your tax bracket, and
  2. Contributing a lump sum means you’ll pay less tax than if you did nothing

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