Don’t leave anything on the table when it comes to tax DEDUCTIONS!
The challenges facing government at the moment seem insurmountable. A R60 billion tax shortfall for the tax year ending March 2020, the threat of ratings agency Moody’s downgrade, corruption and inefficiency in critical State-Owned Enterprises, an unsustainable wage bill and massive job losses to name a few. In the end it is most often the taxpayer to whom government looks in order to solve the do or die financial crisis it finds itself in.
While there is NO WAY OUT OF TAXES, the Taxman can give you a helping hand! In the January Newsletter, Melissa Dyer detailed numerous annual tax incentives SARS offers to encourage South Africans to save for retirement and I want to delve into the ‘tax saving’ opportunity the Tax Deduction for Retirement Funding offers.
As mentioned, you are entitled to a tax deduction for any contributions made to your retirement funds of up to 27.5% of your taxable income/ remuneration, up to maximum of R350,000 per year. It doesn’t matter whether you have a pension, provident or retirement annuity (RA) fund – or even a combination of all three – you’ll qualify for this tax deduction.
To put this often forgotten and underutilized deduction in perspective, let us look at a practical example.
Portia’s taxable income is R30K a month and she contributes R600 to her RA and R1000 to her Provident Fund each month.
Her total retirement contributions for the year are:
(R1000 x 12) + (R600 x 12)
= R19 200 p/a
Her annual taxable income before deductions is:
(R30 000 x 12)
= R360 000 p/a
This means that Portia can claim a deduction of up to R99 000 (27.5% of R360 000) but she is limited to her actual contributions, so in this case only R19 200 can be deducted from her taxable income for the year.
“With annual increases coming up it is critical that you ensure you are making use of the highest amount you can contribute to your retirement funds.”
The opportunity lies in the difference between the maximum of R99 000 she is eligible to deduct and the R19 200 she is currently allowed to deduct. This in effect is leaving R79 800 on the table to be taxed.
For those who are not self-employed, it is also important to clearly understand the retirement benefit structure that you have through your company. Many companies give their employees the option of selecting a percentage (%) of their Pensionable salary that they would like to base their retirement contribution on. For example, you could select 50%, 75% or 100% of your pensionable salary meaning that if you are contributing say 10% to your fund, the contribution will be 10% multiplied by the % of your pensionable salary you have selected. This decision will drastically affect the amount you are putting towards retirement and can claim a tax deduction against. Decisions taken when you are in a position where your financial situation requires disposable income should be reviewed regularly as that financial position changes. You might select to only contribute 10% of (50% of your pensionable salary) and that is fine if that is what your current situation requires.
The risk lies in not reviewing your financial needs regularly, leaving your contribution amount at its bare minimum and then a few years down the line you find not only have you missed the annual tax saving opportunities but you could have insufficient funds to retire. This scenario is negatively compounded if your employer matches your contribution, meaning that their contribution on your behalf is at its lowest as well.
A live example is where a friend of mine, being a single parent when she started her working career, opted to have her contribution based on 50% of her pensionable salary giving her a larger take home salary. Having stayed with the same company for 15 years, when she resigned, she realized that both her and the company’s contribution had been based on 50% of her pensionable salary for the past 15 years.
Even though she could have afforded this to be increased to 100% of her pensionable salary after year 2, when she had more disposable income, she had forgotten the initial selection she had made and in essence reduced the amount contributed to her fund over those 13 years by half, excluding the compound interest loss!
With annual salary reviews in progress it is of key importance that you ensure you are making use of the highest amount you can contribute to your retirement fund through your company.
When you meet with your Financial Adviser, these should be in the top discussion points in your overall planning process. Many of you will have a Pension/Provident Fund, an RA or a combination of these. It is important discuss and evaluate the benefit of contributing more each month to reduce the income on which you pay tax.
If you require a professional advice contact one of our qualified independent Financial Advisors: