Wealthy South Africans can pay less tax

High-net-worth individuals (HNWIs) can maximise their wealth through efficient investment strategies that offer them tax benefits and reduce their costs.

While getting the best investment returns is essential to building and maintaining wealth, this is only one part of the equation. Nedbank said that reducing taxes and costs is just as important.

According to the bank, various investment vehicles with tax benefits are available in South Africa. Tax-free investments (TFIs) are among the most notable vehicles South Africans can use to maximise their tax efficiency.

These investments allow tax-free growth on contributions up to R36,000 per tax year with a lifetime limit of R500,000. If you were to invest the maximum amount every year, it would take 14 years to reach the lifetime limit.

“TFIs are not liable for tax on any returns, including interest, dividends, and capital gains, and they can hold various financial instruments, including cash, stocks, bonds, and unit trusts.”

However, Nedbank warned that it is essential not to exceed the annual and lifetime investment limits to avoid heavy tax penalties during your yearly tax assessment.

Retirement funds are another way South Africans can reduce their tax burden while hedging for their future. These can be retirement annuities (RAs), pension funds, or provident funds.

Contributions to retirement funds are tax-deductible, capped at 27.5% of taxable income or R350,000 a year if 27.5% of your taxable income exceeds that amount.

No income tax, capital gains tax, or dividends withholding tax is payable on investment returns during the investment period.

Upon retirement, two-thirds of the retirement interest must be used to buy annuities that will pay you a regular pension or annuity, subject to your marginal tax rate.

RAs are very popular long-term investment vehicles designed to help you save for retirement while enjoying certain tax benefits. These contributions are deductible to certain limits and have tax-deferred growth while you contribute.

Importantly, consumers should avoid making early withdrawals through the two-pot system to get the biggest benefit from their retirement investments.

Not only would you lose out on the compound interest you would have received by not touching your savings, but deductions are also subject to tax at your marginal rate.

Nedbank said other tax-efficient investment vehicles are unit trusts and exchange-traded funds (ETFs). These are popular investment vehicles in South Africa.

This is because they offer diversified exposure to various asset classes, both local and international. Today, users have easy access to these through platforms like EasyEquities.

Unit trusts and ETFs are tax-efficient because they defer capital gains and optimise foreign dividends, withholding taxes, and situs taxes, though this also depends on the fund or trust’s risk profile.

If you’re unsure, the bank advised that it is always consult your broker or investment adviser on the risk you are exposed to, the bank advised.

Local investments

Many high-net-worth individuals with extensive local portfolios may consider offshore investment exposure to diversify even further.

While this could be a wise course of action to earn high yields and diversify your portfolio, Nedbank explained that certain tax implications also need to be considered when deciding between local and offshore investments.

Rand-denominated offshore unit trusts, which are often offered by local fund managers, do not require a tax clearance certificate when you invest in rands.

Investors do not need to manage foreign exchange regulations since the fund does this. However, you’ll be liable for capital gains on your original rand investment and taxed on interest and dividends.

Dividends earned from local companies attract dividend withholding tax, which is automatically withheld, so you have no further obligations once you receive a net dividend.

The feeder fund manager selects suitable offshore funds in the best jurisdictions to optimise foreign dividends, withholding taxes, and situs taxes.

The actual tax you pay on interest from these investments depends on your marginal income tax rate and the type and amount of investment income and capital gains you earn from your investments.

The higher your marginal income tax rate, the more tax you will pay. Individual taxpayers do, however, enjoy an annual exemption on all South African interest income they earn.

The South African Revenue Service sets this exemption every year, but it has remained unchanged for several years. For the 2025 tax year, it is set at R23,800 for individuals under 65 and R34,500 for those aged 65 and older.

Offshore investments

Conversely, if you invest directly with a foreign fund manager or through an offshore investment platform, you will pay capital gains tax on all gains calculated in the fund’s currency.

In other words, you will not pay tax on the rand fluctuations against the fund currency. You’ll pay tax on interest at your individual marginal income tax rate and foreign dividends at an effective rate of 20%.

Your fund manager must select the suitably located offshore funds in the best jurisdictions to optimise foreign dividends, withholding taxes, and situs taxes.

Using foreign currency to invest in foreign funds, you can take up to R1 million offshore a year without applying for a tax clearance certificate.

Since South Africa uses a residency-based tax system, South African residents must pay tax in South Africa on income from anywhere else in the world.

Suppose the tax on the interest or foreign dividends on your investments is deducted in the foreign currency. In that case, you will be granted tax credits for foreign taxes paid against South African tax, subject to certain limits.

That means that you will not be subject to double taxation. If you’re earning dividends from a foreign company in which you own more than 10% of its equity, you are exempt from tax.

Many wealthy South Africans may also be concerned about capital gains tax considerations. Nedbank noted that this tax only applies if you sell all or part of your investments.

If those investments have risen in value since you bought them, you are taxed on 40% of the positive difference in value, which will be included in your annual taxable income.

Since you are an HNWI, you will likely be taxed at the maximum marginal tax rate of 45%. This makes your effective capital gains tax rate 18%, with an annual exclusion of R40,000.

“Tax regimes and responsibilities can be complicated when you have a sizeable investment portfolio as an HNWI. It’s always wise to seek professional advice.”