The tax season is upon us, with the usual angst of having to get our financial ducks in a row or risk posting an incorrect return and getting audited.
If you are a salaried employee your scope to lower your tax burden is quite limited, says Steven Nathan, founder and chief executive of 10X Investments.
“Most of the deductions require that you spend money first, for example, by making a donation, incurring legal or medical expenses, or paying income protection premiums. You can claim those deductions if you incurred these expenses, but it makes no sense to incur them just to save tax,” he said.
However, there are still options, and one of the best ways pay less tax without it actually costing you money is by contributing to a retirement fund or getting your employer to do it on your behalf, said Nathan.
“You may see it as an expense because it reduces your take-home pay but, in fact, you are merely moving money around on your balance sheet, out of ‘cash’ and into ‘investments’.
“This also moves money from an unproductive asset, in the form of cash, to a productive asset. Over time, cash returns beat inflation by around 1% per year before tax, while a high equity investment return beats inflation by around 6.5% per year,” he said.
He noted that this can be done with a significant amount of money, and you can deduct total contributions to a pension, provident or retirement annuity fund up to 27.5% of your taxable income. The overall limit is R350,000 per annum.
“How much tax you save depends on your marginal tax rate,” he said.
“If the highest tax rate applied to your income is 30% you save R30,000 in tax for every R100,000 you contribute over the year. For the fortunate few in the highest tax bracket (45%) contributing the maximum amount (R350,000) means a potential tax saving of R157,500 pa.
“If you currently save 10% of income pa, shoot for 15%. While the impact on your monthly take-home pay will be modest (less than 5%), you stand to boost your retirement benefit by 50%. ”
How you do it
If you already belong to a workplace pension or provident fund, Nathan said you should ask your HR representative to increase your contribution rate (subject to what your fund rules allow).
In that case, you won’t get a tax refund. Instead you will immediately pay less tax every month.
“If you don’t belong to a workplace retirement fund, or the rules don’t allow you to increase your contributions, then take out an RA fund instead,” he said.
“You claim your RA contributions when you submit your annual tax return, using the IT3(f) tax certificate from your provider as evidence. You qualify for a tax refund on those contributions.”
“If you cannot afford a higher monthly contribution, consider making ad-hoc lump sum contributions when you can afford to. Most pension and provident funds allow for an AVC, an additional voluntary contribution. Your HR department will assist you with this. This is something to consider if you are in line for an annual bonus, or 13th cheque.”
The other way to increase your RA contribution rate without reducing your take-home pay is by re-investing the annual tax return payment as a lump-sum, he said.
“As a result, your refund will increase every year, and within a few years (depending on your tax bracket), you are saving at the recommended 15% pa or even more.”