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Tax deductions for Pension, Retirement and Provident funds simplified

Tax deductions for Pension, Retirement and Provident funds simplified

All contributions to pension, retirement annuity and provident funds can be deducted from the individual's taxable income. The deduction is capped at a rate of 27.5% of the greater of remuneration and taxable income. In other words, if say your total pension fund contributions for the year was R100 000, your taxable income was R200 000, and your remuneration was R300 000, then your deductions would have been limited to 27.5% of R300 000 (since R300 000 is greater than R200 000). Thus your deductions would have been limited to R82 500.

From our example above you would notice that R17 500 (R100 000 - R82 500) were not allowed for a deduction in the relevant tax year. However, the deductions that were not allowed is carried over to the following tax year and deemed as contributions for that tax year. In other words say for the next tax year your pension contributions were R100 000, your taxable income R300 000 and your remuneration R400 000. Thus your allowed deduction would be R400 000 x 27.5% = R110 000. You only contributed R100 000, but now you can also deduct R10 000 of the R17 500 from the previous year, thus a total deduction of R110 000. The remaining R7 500 is now carried over to the following tax year.

Some technical points:

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