Contributions made by you or your employee to the following retirement funds may be deductible for tax purposes, subject to certain limits:
- A pension fund,
- Provident fund, or a
- Retirement Annuity
Here’s how it works:
- You’re allowed to contribute 27.5% of your taxable income towards a Retirement Annuity to get a reduction in the amount of tax you owe.
- This 27.5% amount is limited to R350, 000 for the tax year. The only time this becomes an issue is when you earn more than R1, 272, 727 a year. If that’s you, then tax deductions are the least of your concerns.
But watch out…
Your pension and provident fund contributions also form part of this calculation. It’s not only your contributions to the fund but your employer’s contributions as well.
And don’t think that taxable income is limited to your taxable salary as per your payslip. Taxable income includes any form of passive income which you need to declare. So, remember to include any rental income or interest when doing the calculation.
The good news though is that any contribution which exceeds the 27.5% is carried over to the following year and forms part of the calcution in that year.
Does this mean that you’ll pay 27.5% less tax?
Not quite!
Take for example two people, let’s call them Simon and Peter. Both earn R240,000 a year. Simon doesn’t have a Retirement Annuity, while Peter contributes the full 27.5% allowed.
Simon – with no Retirement Annuity
- R240, 000 gross income in 2017/8
- No deductions at all
- He pays tax on R240, 000
- Tax payable on that income is R33, 574
Peter – with a Retirement Annuity
- R240, 000 gross income in 2017/8
- R240, 000 x 27.5% = R66, 000 (or R5, 500 per month) per annum contributed to his Retirement Annuity and allowed as a deduction
- His taxable income drops to R174, 000
- Tax payable is R17, 685
The difference in the tax paid between the two of them is R15, 889.
So how much then gets paid by the taxman?
Peter’s Retirement Annuity contribution works as follows:
- Peter contributes R66, 000 per annum to his Retirement Annuity
- R66, 000 annual contribution – R15, 889 in tax which he saved = R50, 111 out of his pocket
In simple English:
- R5, 500 a month is what Peter contributes to his Retirement Annuity
- R4, 175 a month of that comes out of his pocket
- R1, 325 – or 24% of the R5, 500 – is paid by the taxman
Conclusion
No other privately-owned investment does what a Retirement Annuity can do for you. Of course, you don’t need to invest the full 27.5% allowed. Start off with what you can afford, but the important thing is just to start.
We haven’t covered all the advantages of owning a Retirement Annuity in this article, but definitely, the single biggest advantage to owning an RA is the tax money you get back every year.
Until next time.
The Wise About Life team
