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Reducing Income tax by contributing towards a Retirement Fund - Tax Deductions

Writer's picture: Stephanie ToerienStephanie Toerien

Contributing to a Retirement Annuity (RA) or Pension Fund (PF) is a common strategy to reduce your taxable income and save for retirement in South Africa. Contributions made to an RA or PF are tax-deductible, which means that the amount you contribute is subtracted from your total taxable income, reducing your tax liability. Here's how Retirement Fund Income Tax Deductions works:

Retirement Fund Income Tax Deductions
Enjoy the beauty in life by doing your tax planning

  1. Contribute to an RA: You can contribute to an RA through a financial institution or an approved RA provider. The contributions you make to your RA are invested, and the returns on these investments grow tax-free within the RA.

  2. Deductible Contributions: The contributions you make to your RA can be deducted from your taxable income, up to certain limits specified by the South African Revenue Service (SARS). These limits are subject to annual changes and depend on various factors, including your age and income.

  3. Claiming the Tax Deduction: When you file your annual income tax return, you can claim the deductions for the contributions you made to your RA. This reduces your taxable income, which, in turn, lowers your income tax liability for the year.

  4. Limitations and Rules: The deduction for contributions to an RA is subject to certain maximum percentages of your income.

  5. Keep Records: It's important to keep accurate records of your contributions and obtain annual statements from your RA provider, as you will need this information when filing your tax return.

  6. Age and Retirement: When you reach retirement age, you can start receiving annuity payments from your RA or PF, and these payments will be subject to taxation. However, a portion of your annuity may be tax-free, depending on the rules in effect at the time.


How does the Retirement Fund Income Tax Deductions work:

From 1 March 2016 the tax laws changed and now it doesn’t matter whether you have a pension, provident or retirement annuity (RA) fund – you’ll qualify for a tax deduction of up to 27.5% of your taxable income (up to a maximum of R350 000 per year). This limit applies to the total contributions you made into all funds for the whole year. See Example below.


This means you'll save a significant amount on your annual tax bill – which is a great reason to start saving for your retirement now, if you haven’t already.

PS. It is important to remember both contributions yours and your employers contributions count towards this deduction.


What happens if your contribution exceed the limit?

If the deduction is limited, the amounts are carried forward to the following year of assessment and can be claimed as a deduction in the following year of assessment. Amounts that are not claimed as a deduction in any year of assessment, as a result of the limitation, are compounded. When the individual retires, for example, the compounded or excess contributions that did not previously rank for deduction or which were not exempted, can be used to reduce the gross lump sum figure on which the tax will be calculated.



Example

Let’s say your taxable income (which includes salary, rental income, freelance income etc) is R 30 000 per month and you contribute R 900 to an RA and R 600 to a provident fund each month.

This means your total retirement contributions for the year are:

(R 900 x 12) + (R 600 x 12)

= R10 800 + R7200

= R18 000

Your annual taxable income, before deductions, is R 360 000 (R 30 000 x 12 months).

This means that you can claim a tax deduction of up to R 99 000 (27.5% of R 240 000). You’re limited to the total of your actual contributions though, so in this case the amount of R18 000 can be deducted from your taxable income for the year.

Taxable income = R 360 000

Retirement fund deduction allowed = R 18 000

R360 000 – R18 000 = R342 000

So, your ‘new’ annual taxable income (after deductions) is R342 000. This will be the amount used to calculate your tax and not R360 000.


It’s always best to keep a record of all the retirement contributions you make across all the different funds you contribute to each month, so you know exactly where you stand.


With this you can see that contributions can significantly lower the tax you pay per year. Here at Labyrinth we work together with our clients to discuss how we can lower the total amount of tax they pay and how they can end up with more of their hard earned money in their own pocket. In this post we give more tips on how to reduce your tax liability. You can use this calculator to see how contributing to a retirement fund can benefit you.


Contact us today to find out how we can assist you with lowering your tax liability.

It's important to note that tax laws and regulations can change, so it's essential to stay updated on the latest tax rules and consult with a tax professional or financial advisor to ensure you're maximizing the benefits of contributing to a Retirement Annuity while staying compliant with South African tax laws.

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