How to pay less tax in South Africa – legally

With major concerns about increased taxes in South Africa, it’s important for every South African to be reminded that there are ways to legally minimise how much of your hard-earned money you hand over to the government.

Broadly speaking, this can be accomplished by:

• Maximising retirement contributions
• Using Tax-Free Savings Accounts
• Tracking medical expenses and medical scheme contributions
• Hiring professionals to assist with tax planning

The government has planned major social security changes for the country—the main ones being the Basic Income Grant (BIG) and the National Healthcare Insurance (NHI) Scheme—pointing to tax reforms and hikes as the main source of funding.

While these initiatives could theoretically benefit South Africans, they require much more money than the government currently generates through revenue.

This ‘extra’ amount needed to fund these programs is immense and, given the country’s massive debt bill, will have to come from taxpayers – which means big tax hikes for the country’s already narrow tax base.

Compounding this, Finance Minister Enoch Godongwana announced during this year’s Budget Speech that the government would not adjust personal tax brackets for inflation, which is expected to run at 4.9% this year.

The lack of adjustment of tax tables and tax deduction limits for inflation results in a phenomenon called ‘bracket creep’.

It causes taxpayers to pay more, resulting in increased revenue for the government without hiking the tax rates.

This strategy is used to help fill the widening deficit. South Africa’s personal income tax base is expected to grow to 7.41 million in 2024, which is only a 15.43% increase from a decade ago.

However, it is worth noting that the government’s personal income tax revenue has increased by 109% over the same period – outstripping inflation by 48.4%.

In tough economic times, tax avoidance is crucial for taxpayers in South Africa as it allows them to legally reduce their tax liabilities, thereby freeing up funds to cope with financial pressures.

By minimising tax payments, individuals and businesses can allocate more resources towards essential expenses, investments, and savings, which is vital for maintaining financial stability during economic downturns.

For individuals, it can ease the burden of living costs and debt obligations.

Additionally, in a challenging economic climate, every financial advantage helps sustain livelihoods and business viability, contributing to overall economic resilience.

However, while tax avoidance is legal, taxpayers must balance their strategies within ethical and legal boundaries to ensure long-term sustainability and compliance.

According to Tax Consulting SA’s Lambert Roberts, minimising taxes legally in South Africa involves understanding and using various strategies, deductions, and exemptions provided by the South African Revenue Service (SARS).

“By understanding and applying these strategies, you can effectively manage and minimize your tax liabilities in compliance with SARS regulations,” he said.

Considering this, Roberts outlined the main ways of minimising tax payments in South Africa, which are listed below.

Maximise retirement contributions

Contributions to retirement funds are tax-deductible up to certain limits. Ensure you’re contributing the maximum allowable amount to your pension, provident, or retirement annuity funds.

This can be done either personally or through your employer. Amounts contributed to pension, provident, and retirement annuity funds during a year of assessment are deductible by members of those funds.

The deduction is limited to 27.5% of the greater of the amount of remuneration for PAYE purposes or taxable income (excluding retirement fund lump sums and severance benefits).

The deduction is further capped at the lower of R350,000 or 27.5% of taxable income before the inclusion of a taxable capital gain.

Any contributions exceeding these limits are carried forward to the next year of assessment.

Tax-Free Savings Accounts (TFSAs)

Investing in a TFSA allows you to earn returns on your investment without paying tax on the interest, dividends, or capital gains.

Rather than letting your savings sit in an interest-bearing account, which will attract tax when the interest earned exceeds R23,800, use a TFSA.

To avoid penalties, the total annual contribution in a tax year should not exceed R36,000, with a total lifetime contribution limit of R500,000.

Medical expenses and medical scheme contributions

Despite uncertainties surrounding the implementation of National Health Insurance, taxpayers can still claim medical tax credits, deductions for medical aid contributions, and out-of-pocket medical expenses

Keep detailed records and receipts of all qualifying medical expenses.

Tax Planning and Advice

Consider consulting with a tax professional or financial advisor to help navigate the complexities of
the tax system and develop a tax-efficient strategy.

Keep up to date with changes in tax laws and regulations.

Regularly review your financial situation and tax strategies to ensure they remain effective.

Read: SARS announces big changes for tax season 2024 – including solar and tax-free savings