Don't miss out on tax gifts even in this hard, trying time

Nobody enjoys paying taxes. Even more so with income streams running dry due to the Covid-19 lockdown.

Image: 123RF/ANDRIY POPOV

Nobody enjoys paying taxes. Even more so with income streams running dry due to the Covid-19 lockdown.

Didintle Mokonoto
Didintle Mokonoto

But the SA Revenue Service has some secret gifts. They're called tax incentives, and they relate to rebates, deductions and exemptions - all the elements of your tax planning that deal with money coming back in from Sars, not just flowing out.

This week the finance minister announced some exceptional tax measures to help employers keep employees in their jobs despite the economic fall out from Covid-19.

These measures include a tax subsidy of R500 a month for some four million employees earning less than R6,500 a month, accelerated payments of the employment tax incentive and delayed payment of 20% of tax due for small businesses with a turnover of less than R50m.

But for individuals there are two relatively simple ongoing incentives that everybody should make the most of to improve their finances.

These relate to retirement savings and investing in a tax-free savings account.

Here's how it works:

Prioritise your retirement

Amid a potential cash crunch due to the lockdown, you'd be tempted to dip into your retirement savings, but it's best to hold off on that move as saving towards your retirement has never been more crucial.

I acknowledge it's hard to save towards something so far in the future, especially when there's so much right now that demands your attention. Here's where the government tax incentive comes into play.

It's designed to encourage people not to bury their heads in the sand, and pretend that the future will take care of itself. The tax incentive applies to any individual who invests in a retirement annuity (RA), pension fund or provident fund.

You can save much more into these funds than the minimum amount - up to 27.5% of your taxable income or R350,000, whichever is greater. In other words, you can put aside a lot of money without being taxed, as long as you're saving towards your retirement.

It doesn't end there: The money invested in an RA, pension fund or provident fund is not subject to tax on interest, dividends or capital gains.

This means that your retirement investment can benefit fully from compound interest over the years, and grow and grow and grow!

Let's take an example: Lerato is a 30-year-old psychologist who works for a private hospital.

She earns R40,000 a month (R480,000 a year), and she belongs to the hospital pension fund, contributing the minimum of 7.5% of her salary (R36,000 a year). In doing so, she reduces her taxable income to R444,000 (R480K minus R36K) and her tax bill for the year will, therefore, be about R83,850.

However, if she increases her contribution to 15% of her salary (R72,000 a year), she will reduce her taxable income to R408,000, thereby reducing her tax bill to about R78,970. That's R4,480 that stays with Lerato and doesn't go to Sars.

The money is in a retirement fund, sure, but more money in the fund means faster growth and a much better chance of financial security later in life.

Start a tax-free savings account:

A tax-free savings account is another product that the government has created to encourage you to save. It's great for long-term investing - to fill up your retirement pot further.

Contributions towards a tax-free savings account are not tax-
deductible as they are with retirement products, but the benefit is that you don't pay tax on any interest, dividends or capital gains earned by the product, and you don't have to pay tax on withdrawals.

The legislation allows individuals to invest as much as R36,000 a year into a tax-free savings account, to a maximum of R500,000. Take note of these limits because Sars will charge you a 40% penalty on contributions over and above the threshold.

* Mokonoto is a financial coach at Wealth Creed

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