UNDERSTANDING MARGINAL AND EFFECTIVE TAX RATES

not taxed if you are under the age of 65. To take this into account, you need to work out your tax according to the table and then deduct the primary rebate. If you are older than 65, the amount on which you do not pay tax, and hence the rebates, is higher.

For example, the tax table shows 18 percent of R188 001 (the threshold at which your rate changes from 18 percent to 26 percent) is R33 840; in the third tax band, R61 296 is the result of (R293 600 – R188 001) x 26 percent plus R33 840; in the fourth band, R92 264 is the result of (R550 100 – R406 401) x 31 percent plus R61 296. As the example indicates, your taxable income is not taxed at the same rate – in other words, if your taxable income qualifies for a marginal tax rate of 31 percent, it doesn’t mean you pay 31 cents in every rand you earn, but 31 cents on every rand you earn above R293 601.

To determine how many cents in every rand of your income you pay as tax, you need to work out your effective tax rate. This you can calculate by taking the amount of tax you pay and dividing it by your taxable income. Your effective rate will always be lower than your marginal tax rate.

You should not confuse your gross income and your taxable income.

◆ Gross income: the income you receive from all sources, such as your salary (or pension), commission and investments (excluding capital gains).

◆ Taxable income: your gross income less what is exempt from tax (for example, returns on money in a tax-free savings account) and less any amounts you can claim as deductions (for example, contributions to retirement funds). The result is your taxable income, to which you must add taxable capital gains and taxable business allowances (for example, a travel allowance). The tax payable on this amount is reduced by the rebates and the medical tax credits.