Tax on Employee Contributions to Retirement Funds
Before these changes, contributions to a provident fund had no tax benefit, and pension funds and retirement annuities each had their own set of complex deductions and limits.
As of 1 March 2016 this changes.
Irrespective of whether you have a pension, provident or retirement annuity (RA) fund – or even a combination of these – you will qualify for a tax deduction of up to 27,5% of your taxable income (to a maximum of R350,000 per year). This limit applies to the total of contributions you made to all funds for the year. This means you’ll save a significant amount on your annual tax bill – a great reason to consider starting to save for your retirement now if you haven’t already.
For example, let’s say your taxable income (which includes salary, rental income, freelance income, etc.) is R10,000 per month and you contribute R1,000 to an RA and R600 to a provident fund each month.
This means your total retirement contributions for the year are:
(R1,000 x 12) + (R600 x 12)
= R12,000 + R7,200
Your annual taxable income, before deductions, is R120,000 (R10,000 x 12 months).
This means you can claim a tax deduction of up to R33,000 (27,5% of R120,000). You’re limited to the total of your actual contributions though, so in this case the amount of R19,200 can be deducted from your taxable income for the year.
Let’s do the maths.
Taxable income = R120,000
Retirement fund deduction allowed = R19,200
R120,000 – R19,200 = R100,800
So your ‘new’ annual taxable income, after deductions, is R100,800. This will be the amount used to calculate your tax and not R120,000.
Under the old laws, before 1 March 2016, the only amount allowed to be deducted would’ve been the RA contribution of R12,000. Under the new rules, you’re getting an additional R7,200 in tax deductions.
What About Employer Contributions to Retirement Funds?
Many employers structure salaries in such a way that they make contributions on your behalf to a pension, provident or RA Fund automatically each month. This is still allowed come 1 March 2016 but your payslip may look a little different. From then, these contributions will be included as part of your income, but it will be taxed as a fringe benefit.
So yes, they’ll be subject to tax, but because these contributions will be deemed to have been made by the employee (that’s you), you’ll be able to claim your retirement fund tax deduction come filing season if you file your tax return correctly.
Why did SARS do this?
Essentially they’re aiming to make contribution deductions fairer for all taxpayers and discourage high-income taxpayers from structuring a high percentage (e.g. 30%) of their salary package as an employer contribution to a provident fund, cutting their tax obligation.