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We believe there is a better way. We are an accounting, tax and business consulting firm based in Stellenbosch.

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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:

  • Both contributions made by an employer and the employee are deemed as contributions made by the employee and thus part of the deductions. The employer contribution is now included in the taxable income of the employee by way of a fringe benefit.
  • In the example, the taxable income and remuneration exclude retirement lump sum and severance benefits

Update: Completing your income tax return:

Our institute (SAIT) has alerted us on the following matter:

If you see the following error when saving or submitting your return:

The 'Total contributions for this year of assessment' must be equal to the sum of 'Contributions made this policy.'

To correct this, please ensure that you have completed the Retirement Annuity section correctly. The new Retirement Annuity section allows you to complete the details of multiple policies held – look out for the additional containers labelled “Details of Policy(ies)” below the field that houses source code 4006. 

At each container, you are required to complete the contribution for that particular fund (e.g., for Policy 1 you have contributed R5 000, for Policy 2 you have contributed R2 000). The sum of all contributions made to all policies should be completed next to the source code 4006, which is the first container located under the Retirement Annuity section. Example: (Policy 1) R5 000 + (Policy 2) R2 000 = R7 000; therefore R7 000 is the amount that should reflect at source code 4006. 

Important! Even if you make contributions to only one policy, the details of that policy and the amount contributed still need to be completed in the details section. 

Get our iOS app to help you with monthly and annual payroll tax calculations (including pension, retirement and provident fund): https://itunes.apple.com/za/app/taxtree/id1263890353?mt=8

Would you like us to complete your tax return, just complete our online form: https://www.chconsulting.co.za/online-services/individual-tax-return

For help in your tax matters, please contact us, we serve clients across South Africa and internationally. https://www.chconsulting.co.za/contact

Please note that any advice given on this blog or in any comments of this blog does constitute a legal tax opinion, and the taxpayer cannot rely on it as such. The taxpayer relies on any content of this blog or the comments of this blog at their own risk. For a legal tax opinion, please engage us directly for a consultation. 

Author: Chris Herbst from CH Consulting

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Comments (137)

This comment was minimized by the moderator on the site

There seems to be a lot of confusion even amongst tax accountants. Can you include the taxable portion of your capital gains in your taxable income calculation on which the 27.5% RA contribution is based. Some say yes, some no. Even Allan Gray...

There seems to be a lot of confusion even amongst tax accountants. Can you include the taxable portion of your capital gains in your taxable income calculation on which the 27.5% RA contribution is based. Some say yes, some no. Even Allan Gray has published a notice this week to say you can. On a R100k CG you would then be able to add (100 - 40) x 40% = R24k as taxable income and be able to push 27,5% of R24k into an RA (subject to the R350k limit).

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This comment was minimized by the moderator on the site

SARS has changed definition of the word "remuneration" when it comes to this 27.5% rule. In this case remuneration includes the amount of any Capital Gain profit that is added to your normal income and also taxable and tax free interest etc...

SARS has changed definition of the word "remuneration" when it comes to this 27.5% rule. In this case remuneration includes the amount of any Capital Gain profit that is added to your normal income and also taxable and tax free interest etc including after-tax income from SA dividends (normally taxed at 15% before you get them). Also included in "remuneration" is profit from rental of properties.

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This comment was minimized by the moderator on the site

Are contributions carried over from the prior tax year allowed as a deduction in the 2017 tax year under this new rule ? Limited to the 27.5% of course

This comment was minimized by the moderator on the site

Hi Irene,
Thank you for your comment.
Assuming your contribution in the prior year was to a pension or retirement fund you can add this to your 2017 tax year deduction, subject to applicable limits.

This does not apply if your contributions were...

Hi Irene,
Thank you for your comment.
Assuming your contribution in the prior year was to a pension or retirement fund you can add this to your 2017 tax year deduction, subject to applicable limits.

This does not apply if your contributions were to a provident fund. However from the 2018 tax year you will be able to carry forward excess provident fund contributions as well.

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This comment was minimized by the moderator on the site

In the 2017 tax year the taxpayer may claim allowable contributions to R/A, Pension and Provident funds added together as Retirement Fund under the new 27.5% rule.. Arrears contributions to R/A and Pension funds may be claimed together with...

In the 2017 tax year the taxpayer may claim allowable contributions to R/A, Pension and Provident funds added together as Retirement Fund under the new 27.5% rule.. Arrears contributions to R/A and Pension funds may be claimed together with current R/Fund contributions or these disallowed contributions may be added up and added to the lump sum taken at retirement. Arrears contributions to Provident funds may not be claimed in 2017 as Provident Fund contributions were not allowed as a claim in previous tax years.

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This comment was minimized by the moderator on the site

When will the arrears provident fund contributions carried forward be deductible?

This comment was minimized by the moderator on the site

Hi Gillian,
Thank you for the comment.
As from 01 March 2016 a provident fund is handled in the same way as a pension and retirement fund. Thus any excess contributions can be carried forward to the 2018 tax year (01 March 2017 - 28 Feb 2018)....

Hi Gillian,
Thank you for the comment.
As from 01 March 2016 a provident fund is handled in the same way as a pension and retirement fund. Thus any excess contributions can be carried forward to the 2018 tax year (01 March 2017 - 28 Feb 2018). However please note that arrear contributions and excess contributions are two different thins. Arrear contributions are when you make contributions in the current year for years in the past where you did not utilise your maximum contribution. Whereas excess contributions are the amount you contribute above your allowable amount for the specific year.

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This comment was minimized by the moderator on the site

Is code 3817 included in code 3699?

This comment was minimized by the moderator on the site

Yes. Code 3817 is the taxable element of employer's contributions and is included in code 3699 on the IRP5. Have a look at this video lecture. The part that concerns your query starts at 1 minute and 55 seconds https://youtu.be/Q6Ki2mfqwC8

This comment was minimized by the moderator on the site

According to the document that SARS released in April this year to employers, code 4001 includes current and arrears contributions to pension funds and code 4002 has been done away with. The same with code 4006 to R/A funds. Are we missing...

According to the document that SARS released in April this year to employers, code 4001 includes current and arrears contributions to pension funds and code 4002 has been done away with. The same with code 4006 to R/A funds. Are we missing something here or have SARS not thought this through?

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This comment was minimized by the moderator on the site

Hi Tony,
Thank you for your comment. That is indeed correct. Although current and arrear pension / retirement fund contributions remain two different things by nature, SARS now deems this as the same thing for tax purposes. To be clear...

Hi Tony,
Thank you for your comment. That is indeed correct. Although current and arrear pension / retirement fund contributions remain two different things by nature, SARS now deems this as the same thing for tax purposes. To be clear irrespective of whether you have paid current or arrears contribution they will be deemed the same in terms of the tax deduction (subject to limitations) and thus use the same code pension 4001, retirement 4006.

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This comment was minimized by the moderator on the site

Nice to know I am still sane! Thanks Chris.

This comment was minimized by the moderator on the site

So any provident fund contributions carried forward from prior years against code 4003 will still be carried forward? I was under the impression that those would then fall into the new retirement reforms and would be able to be deducted subject...

So any provident fund contributions carried forward from prior years against code 4003 will still be carried forward? I was under the impression that those would then fall into the new retirement reforms and would be able to be deducted subject to the rule 27.5% of taxable income limited to R350 000.

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