How can I pay less tax?
As accountants, the most frequently asked question has to be, how can I pay less tax. We strongly believe in budgeting, setting financial saving goals and spending your money responsibly. SARS will reward you in turn for making these savings and contributions, here are the three top tips for using your money in the savviest way with SARS.
The most common ways to save money we believe are as follows:
- Being part of a Medical Aid
- Contributing to a Retirement Annuity or Pension Plan
- Contributing to a tax-free savings account
Let’s unpack these in more detail.
Being part of a registered Medical aid means you get medical tax credits. Every month, if you’re claiming on your payslip, R332 (2021/2022) gets taken off your taxes due. This amount changes each year and if you pay for your spouse or dependents you benefit from additional tax savings.
- R332 per month for the taxpayer who paid the medical scheme contributions; or for a dependent who is a member or a dependent of a member of a medical scheme or fund, where the taxpayer him- or herself is not a member of a medical scheme or fund.
R664 per month for the taxpayer and one dependant; or R664 in respect of two dependants where the taxpayer him- or herself is not a member of a medical scheme or fund.
- R224 per month for each additional dependant
Many people want to save and submit medicine slips and invoices from doctors for their tax return, but this will only reduce your taxes if you have significant medical costs in a year. For people under 65 without any disabilities, the calculation is as follows:
25% of [(Medical Aid payments - 4 x Medical Tax Credits+Medical Expenses) - 7.5% x Taxable Income]
For example, if you were not part of a medical aid, had incurred R21,000 in medical expenses and earned R280,000 for the year in income, your Additional Medical Expenses Tax Credit would be:
25% x [20,000 - 7.5% x 280,000] = 0 [25%*(21,000 - 21,000)]
Retirement Annuity or Pension Plan
A Retirement Annuity, Pension or Provident Fund is a fund you invest into and receive annuities or income when you retire. The funds have restrictions around the makeup of the fund to ensure that your savings are not invested in too risky a portfolio.
There are many benefits of investing in one of these funds, namely:
- All the growth within the fund is not taxable (interest, dividends, capital gains).
- Up to 27.5% of your taxable income or remuneration (whichever is higher) can be invested (capped at R350,000) and will reduce your taxable income in that year.
- Contributions above the cap are rolled forward into the next year.
- You can take a tax-free lump sum upon retirement
- Up to a third can be taken upfront as a lump sum or all if its less than R247,500
- The first R500,000 is not taxed and thereafter it is taxed at incremental rates – the next 200,000 at 18%, the next R350,000 at 27% and thereafter at 36%.
- Your retirement savings do not form part of your estate duty calculation.
- Your retirement savings are protected against creditors laying claim to your assets.
- You are unable to withdraw your retirement savings until you are 55 without incurring a hefty penalty.
Tax free savings
Tax free savings were introduced as an incentive to encourage household savings. This incentive was available from 1 March 2015. They can be in the form of a unit trust, a money market account, JSE trading fund, a fixed term bank account and more. For tax-free savings, you are limited per year on how much you are allowed to invest and you are also limited to a lifetime amount.It is an effective savings account that does not necessarily have to be for retirement.
You get to keep everything you invest. Below are the key facts to know:
- You don’t have to pay income tax, dividends tax or capital gains tax on the returns from these investments.
- The annual limit for 2021 was R36,000. Any unused amount cannot be rolled forward to the next year.
- If you contribute more than the allowed limit per year, you will be penalized at a rate of 40% on the excess and this will be added to your normal tax payable on your notice of assessment.
- The lifetime contribution limit is R500,000 at the time of writing.
- Parents can invest on behalf of their minor child. The minor child will use his/her own annual or lifetime limits.
- There are no income tax penalties for drawing from the account.
It all comes down to...
The advice comes down to responsible saving, medical aid and long term retirement planning. SARS rewards the responsible. Time is potential earnings, compound interest is your friend and saving is a discipline. Be efficient in all your financial dealings, research and speak to the people who work with these matters day-to-day, ie, us! We love helping people not only save but understand their options.