It’s pretty well documented how a Retirement Annuity (RA) can give you a tax refund, but did you know that it could even bring you down into a lower tax bracket?
Yes, it’s true… but let’s recap first…
If you’re a South African resident for tax purposes and earn income above certain thresholds in a tax year (1 March to 28/29 Feb), you’re required to register as a taxpayer and file a tax return annually.
In order to calculate the amount you pay in a tax year, SARS uses different tax brackets (rates of tax for individuals), depending on the amount of income earned. Naturally, the more income you earn, the higher the tax bracket percentage.
This is what it looks like for the tax year, 1 March 2020 to 28 February 2021, according to SARS’s website:
Rates of tax for individuals
2021 tax year (1 March 2020 - 28 February 2021) - See the changes from the previous year
|Taxable income (R)||Rates of tax (R)|
|1 - 205 900||18% of taxable income|
|205 901 - 321 600||37 062 + 26% of taxable income above 205 900|
|321 601 - 445 100||67 144 + 31% of taxable income above 321 600|
|445 101 - 584 200||105 429 + 36% of taxable income above 445 100|
|584 201 - 744 800||155 505 + 39% of taxable income above 584 200|
|744 801 - 1 577 300||218 139 + 41% of taxable income above 744 800|
|1 577 301 and more||559 464 +45% of taxable income above 1 577 300|
So, if you earned R 150 000 between 1 March 2020 and 28 February 2021 you would fall into the 18% bracket. If you earned R 400 000, the 31% bracket would apply and if you earned R 750 000 the 41% bracket would be in play.
But here’s how that can all change.
Individual contributions made to Retirement Annuities can help reduce your total annual tax liability, give you money back - and even drop you a tax bracket or two if done right.
Consider the following example:
Jack is a hardworking individual who earned a salary of R325 000 in the 2020 - 2021 tax year. This salary puts him in the 31% tax bracket according to SARS. In other words, he pays R67 144, plus 31% tax on the income (salary) that he earned exceeding R321 600, in the tax year starting 1 March 2020 to 28 February 2021.
His HR department deducted the necessary taxes from his salary each month and paid this over to SARS. When Jack files his annual tax return he will be all square with the tax man, i.e. he owns SARS nothing and SARS owes him nothing. So, basically, he gets ‘jack’ back.
Here’s the tax calculation:
|Company Salary only||R 325 000|
|Less Retirement Annuity Contributions over the tax year||R 12 000|
|Taxable income||R 313 000|
|Tax Bracket Applicable||26 %|
|Tax paid to SARS by his employer||R 68 198|
|Tax due by Jack||R 64 908|
|Money back to Jack||R 3 290|
Had Jack contributed R2 000 per month, he could boost that tax back to R 6 410. Not too bad.
The Power Play
As a result of the contributions made to a Retirement Annuity, Jack managed to:
Reduce his taxable income (R325 000 – R12 000)
Drop an entire tax bracket (31% to a 26%)
Get R 3 290 cash paid into his bank account from SARS
Boost his overall retirement savings with a cool R12 000
A Retirement Annuity, when used smartly, not only helps take care of your financial future, but also makes the journey there a tax-rewarding experience.
After all, it is your life and your money. Why give more of it to the tax man?
Just bear in mind, you are allowed to contribute up to 27,5% of your taxable income in total (capped at R350 000) to retirement investments, such as RAs or Pension/Provident Funds.
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