Easy ways to pay less tax in South Africa
South Africans can pay less tax by contributing regularly to a retirement annuity (RA), pension fund, or provident fund. They can also invest tax-free through a tax-free investment account.
There are major concerns that the government will hike taxes to fund election promises, like a basic income grant, and pay for an expanded cabinet.
Experts warned just after South Africa’s national elections that tax hikes might result from a coalition government, which would see the National Treasury try to appease each party’s ambitions.
The government’s plans to implement a Basic Income Grant (BIG) and National Health Insurance (NHI) could lead to significant tax increases in the coming years.
The ANC has consistently extended the Social Relief of Distress (SRD) grant, intending to use it as a foundation for a BIG.
While beneficial, this requires substantial funding that the government lacks, making tax hikes a likely solution.
The SRD grant was allocated R33.6 billion for 2024/25, with an additional R2.2 billion due to an increase to R370 and provisional allocations of R35.2 billion and R36.8 billion for 2025/26 and 2026/27.
Finance Minister Enoch Godongwana mentioned the possibility of a VAT increase to fund the BIG.
At the same time, Deputy Director General Nicholas Crisp confirmed that tax increases would be necessary for the NHI, which is estimated to require at least R200 billion annually.
“Whether that is through VAT or other taxes is a matter for the National Treasury and the Money Bill, which will come later,” he said.
Discovery said the NHI would require a 31% increase in personal income tax, a 6.5% increase in VAT, or a ten times increase in payroll tax.
As a result, many South Africans are looking for ways to reduce their tax burden.
Daily Investor contacted Chris Nel, a licensed Chartered Financial Planner (CFP) and attorney at Africorp Advisory Services, to explain ways South Africans can legally reduce their tax burden.
Contributing to retirement products
The easiest way to reduce your tax burden is by contributing to a retirement annuity (RA), pension fund or provident fund.
Nel explained that contributions to these retirement products are tax deductible and thus can be used to effectively reduce your taxable income.
RAs are particularly popular because they are accessible to individuals who do not have access to employer-sponsored retirement funds.
Contributions to an RA are tax-deductible within the specified limits, allowing you to decrease your annual taxable income.
Specifically, you can claim a tax deduction for contributions up to 27.5% of your taxable income or remuneration, whichever is higher, capped at R350,000 per annum.
The growth within the RA is also tax-free, and at retirement, a portion of the RA can be taken as a lump sum, with the remainder providing a steady income.
Pension and provident funds offer similar tax advantages for employees. Employer and employee contributions to these funds are tax-deductible, reducing the individual’s taxable income.
Tax-free investing
Investing in a Tax-Free Savings Account (TFSA) in South Africa enables you to earn returns on your investment without paying tax on the interest, dividends, or capital gains.
This makes TFSAs an attractive option for growing your wealth efficiently over time.
Instead of leaving your savings in an interest-bearing account, which will incur tax if the interest earned surpasses R23,800 annually, you can benefit from the tax advantages of a TFSA.
Additionally, any withdrawals made from a TFSA are tax-free, providing more flexibility and ease in accessing your funds when needed.
To avoid penalties, your total annual contribution cannot exceed R36,000, and your lifetime contribution limit is R500,000.
Tax-free investment accounts (TFIAs) can hold various investments, including cash, bonds, equities, and exchange-traded funds (ETFs), allowing diversified exposure to financial assets.
By taking advantage of a TFSA or TFIA, South Africans can maximise their savings potential and work towards achieving their financial objectives without the burden of tax implications, Nel said.
Medical aid contributions
South Africans can earn a Medical Scheme Fees Tax Credit (MTC), which reduces the taxable income of individuals who contribute to medical aid.
The MTC applies to fees paid by a taxpayer to a registered medical scheme (or similar fund outside South Africa) for that taxpayer and any dependants.
However, this method of reducing your taxable income is under threat as the government implements its National Health Insurance scheme (NHI).
The government has long promoted a plan to redirect money contributed by individuals to private medical aid towards funding the National Health Insurance (NHI) system.
The Department of Health asserts that this approach would minimise the need for additional tax hikes, as the funds typically allocated to private healthcare would be reallocated to the government.
NHI Deputy Director-General Nicholas Crisp emphasised that implementing this plan would require taxation.
The initial step in this process involves reducing and potentially eliminating medical aid tax credits. This measure would free up funds to support the early stages of the NHI and remove the incentive for South Africans to contribute to private medical aid.
Crisp noted that this idea has been discussed for years in efforts to reduce inequality. The shift would effectively reallocate resources from wealthier individuals to the public healthcare system.
Strategic financial planning
Incorporating contributions to retirement savings into your financial strategy ensures a comfortable retirement and provides immediate tax relief.
You can effectively lower your tax liability by strategically planning your contributions to maximize the allowable tax deductions. This results in immediate financial benefits while securing your long-term financial stability.
For instance, contributions to retirement annuities, pension funds, and provident funds are deductible up to a certain limit, allowing you to reduce your taxable income and save more for the future.
It is advisable to consult with a tax professional or financial advisor to navigate the complexities of the tax system and develop a tax-efficient strategy.
These experts can help you understand the various tax-saving opportunities and ensure that your contributions are optimized for maximum benefit.
Additionally, South Africans should stay informed about changes in tax laws and regulations, as these can impact the effectiveness of their retirement savings strategies.
Regularly reviewing your financial situation and tax strategies is crucial to ensure they remain aligned with current laws and your long-term goals.
Engaging in continuous financial education and seeking professional guidance can help you make informed decisions and adapt to any legislative changes, ensuring your retirement savings are on track to provide the desired financial security.
Comments