Let’s see how you can make a retirement annuity tax benefit work for you.
Are contributions to pension, retirement annuity, and provident funds tax deductible?
In short, yes. All contributions are deductible and result in a retirement annuity tax benefit.
How does my tax benefit work?
SARS will reward you if you contribute to a retirement annuity fund. You receive a reward because, in essence, your older self will not become dependent on the state, making the government’s responsibility less.
You can contribute up to 27.5% of the greater between your remuneration or taxable income to a retirement fund and receive a tax benefit. Still, it is essential to note that your tax benefit maximum is at R350 000 per tax year. Therefore, if you have maximised your benefit, it will be carried over to the following tax year.
The retirement fund deduction will only decrease your taxable income; this is not necessarily a refund you will receive. However, the allowed deduction may result in a refund, depending on your situation.
Practical example:
If Bianca contributes R100 000 to her retirement annuity fund, to what amount will her retirement annuity fund deduction be limited? Her taxable income is R200 000, while her remuneration is R300 000.
27.5% of greater between remuneration or taxable income:
- Taxable Income: Amount: R200 000.00; 27.5%: R55 000.00
- Remuneration: Amount: R300 000.00; 27.5%: R82 500.00
Answer: RA deduction limited to R82 500. The R17 500 will carry over to the next tax year.
Important to note
Both employer and employee contributions are seen as your total contribution, thus forming part of your allowed deduction. The employer contribution is part of the employee’s taxable income through a fringe benefit.
Practical example:
Pieter earns a salary of R235 000 a year; his employer contributes R15 000 per annum to a retirement fund for him. He contributes an additional R15 000 to the same retirement fund; how much will his retirement annuity tax benefit be?
27.5% of greater between remuneration or taxable income:
- Taxable Income: Amount: R250 000.00; 27.5%: R68 750.00
- Remuneration: Amount: R250 000.00; 27.5%: R68 750.00
Answer: RA deduction limited to R68 750. The full R30 000 is a deductible retirement annuity tax benefit.
You are welcome to contact the CH Consulting team. We specialise in a personal tax optimisation approach, and our team will advise you in your tax-savvy endeavour.
(Disclaimer: This does not constitute financial advice)
