Tax deductions for Pension, Retirement and Provident funds simplified

Chris Herbst |
13 April 2016

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

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For help in your tax matters, please contact us, we serve clients across South Africa and internationally.

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