Limit your pay­ments to the tax­man

By in­creas­ing your re­tire­ment fund con­tri­bu­tions, you can lower the amount of money you need to pay to the South African Rev­enue Ser­vice.

Finweek English Edition - - MARKETPLACE PERSONAL FINANCE - By Paul Leonard ed­i­to­rial@fin­week.co.za Paul Leonard is re­gional head: East­ern Cape at Citadel. He is a cer­ti­fied fi­nan­cial plan­ner.

tax sea­son – the pe­riod dur­ing which you are re­quired to sub­mit your an­nual in­come tax re­turn – started on 1 July, and so I thought it would be in­ter­est­ing to look at how long we work for the tax­man in South Africa, me­taphor­i­cally speak­ing. If we as­sume that you do not work on week­ends or on pub­lic hol­i­days, then you have 250 work days for which you will be paid this year. For this il­lus­tra­tion I have ig­nored your an­nual leave – you are paid for those days of leave any­way, so I just kept them in as part of the 250 work days you have.

The tax thresh­old is R75 750 per year for peo­ple younger than 65 this year, which is just above R6 300 per month. This means that any­one earn­ing R6 300 per month or less will pay no tax and they don’t spend any time work­ing for the gov­ern­ment.

If you earn R10 000 per month, or R120 000 this year, then you will pay R7 900 (the tax fig­ures in this ar­ti­cle have been rounded off) in tax this year and 17 of your work­ing days, in other words up un­til 24 Jan­uary, will have been spent work­ing to pay tax to the gov­ern­ment. Since then you have been work­ing for your­self.

At an in­come of R25 000 per month or R300 000 this year, you will spend 41 of your work days work­ing to pay just short of R50 000 in tax. If you earn R50 000 per month or R600 000 this year, you will pay just over R153 000 in tax and it will have taken you 64 of your work­ing days, in other words un­til 31 March to pay your in­come tax.

If you earn a R100 000 per month, then you will spend 83 of your 250 work­ing days this year to pay just short of R400 000 (R396 990) in in­come tax and it will have taken you un­til 3 May to do so.

Just for in­ter­est’s sake, if you earn be­tween R1.14m and R4m this year, you will have com­pleted your tax days some­time in May. Peo­ple earn­ing more than R4m in tax­able in­come this year will spend at least 103 of their 250 work­ing days to pay in­come tax and will have fin­ished work­ing to pay their taxes in the first two weeks of last month. By 14 June ev­ery­one, in­clud­ing those with ul­tra-high in­comes, will have fin­ished work­ing to pay in­come tax.

You can re­duce your num­ber of tax work­ing days by con­tribut­ing to re­tire­ment funds

If, for ex­am­ple, you earn R50 000 per month, you will have 64 tax work­ing days, but if you put 15% of your tax­able in­come into a re­tire­ment fund, like a re­tire­ment an­nu­ity (RA), then you will re­duce your tax days from 64 to 50 tax days. That is a re­duc­tion of 14 work­ing days. Re­mem­ber that does not in­clude week­ends, so it ac­tu­ally means a re­duc­tion of al­most three weeks. To put it dif­fer­ently, in this ex­am­ple, con­tribut­ing 15% to an RA amaz­ingly re­duces your tax work days by 22% be­cause you have re­duced your in­come tax by 22%. You are cur­rently able to con­trib­ute 27.5% of your tax­able in­come to­wards an RA. Re­mem­ber that this is lim­ited to R350 000 for the year. If you earned R50 000 per month and your re­tire­ment con­tri­bu­tion was 27.5%, then you would re­duce your tax work days down to 39. So in­stead of work­ing for the tax­man un­til 31 March, you would have fin­ished work­ing for the tax­man by 23 Fe­bru­ary this year.

This is a great ex­am­ple of where it is valu­able to pay your­self first us­ing re­tire­ment funds – as this case shows, if you earn R50 000 per month, you could cut the amount of time you spend work­ing for the tax­man by a whole month. ■

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