HAD A RAISE? KNOW IN WHICH TAX BRACKET YOU FALL

IN THE Budget Speech in February, Finance Minister Tito Mboweni announced that the tax bracket limits would not be adjusted in line with inflation. This has working South Africans worried that they will fall victim to “bracket creep”.

Most employees don’t understand how their tax is calculated, so they fear the worst.

However, with a little professional tax training, employers can help their workers to overcome this concern and keep them motivated.

Bracket creep occurs when employees receive a pay increase that results in their income falling within a higher tax bracket.

In previous years, the inflationlinked adjustments to the tax brackets would have kept an employee within the same tax bracket.

The result of bracket creep is that, although an employee’s purchasing power remains relatively fixed, the SA Revenue Service (Sars) sees him or her as earning more, and taxes the employee accordingly.

However, only a few employees who are pushed into a higher bracket will pay more tax, and even then it will not be as much as they think.

Many taxpayers falsely believe their entire income for the year is taxed according to the rate linked to the bracket within which their pay falls. However, each bracket represents a specific portion of their total pay, and the tax on any given portion is calculated at its respective rate.

For example, using the 2019/20 tax tables, let’s assume a person earns R325 000 a year. This does not mean their entire pay will be taxed at 31 percent, the rate for that income bracket. Instead, they will be taxed at 18 percent on the first R195 850; at 26 percent on the portion between R195 851 and R305 850; and at 31 percent only on the portion between R305 851 and R325 000.

Sars makes the calculation easier by defining a base tax amount for each bracket, which is the precalculated sum of the total tax for all the preceding brackets. The tax on the last portion (in our example, 31 percent of the amount above R305 851) can simply be added to the base tax to arrive at the total tax payable.

This tax liability will be reduced by a rebate of R14 220, which is available to everyone under 65.

On this basis, it becomes clear that bracket creep affects only that portion of income that strays into a higher tax bracket. So a person earning R100 over the next tax bracket will be taxed at the higher rate only on that R100.

A person who believes they are getting less out because of so-called bracket creep may feel they’re working at a loss.

We’ve found that employees are much more appreciative of their reward package when they have a grasp of how tax affects their takehome pay.

Companies that offer flexible benefits can provide staff with even greater assurance. This remuneration model allows employees to restructure their contributions to benefits on demand, enabling them to control their income’s effective value.

With assistance from a competent tax adviser, workers can channel funds to tax-deductible benefits to reduce the taxable income that falls within their highest bracket.

Leveraging benefits, such as the Employee Bursary Scheme, which enables employees to fund their immediate family members’ educational expenses tax-free, or increasing contributions to an approved retirement fund, are legal ways of minimising your tax liability.

Tanya Tosen and Janine van der Merwe are remuneration specialists at Tax Consulting SA.