Getting Back from the Taxman. Retirement Annuities & Tax Free Savings Accounts
Should you wish to make a top-up to either your retirement annuity or tax-free savings account for the 2024 tax year, please contact us by the no later than Friday 16 February.

The 2024 tax year draws to a close on 29 February 2024.  This is a time of year that many clients look to maximise the benefits afforded to them from the taxman.  This can be done through “topping-up” your retirement annuity and tax-free savings account. Both have their advantages.

In South Africa, a retirement fund comes with three important tax benefits: your contributions are tax-deductible; the returns on your investment are tax-free; and when you retire, you can withdraw a lump sum without paying tax (up to a limit and subject to certain rules).

Why does the government provide these benefits? Because there aren’t enough people saving! Giving people an incentive will hopefully encourage them to plan for their retirement and thereby reduce the burden on the state.

So, how does the tax deduction work? 
It all starts with your ‘taxable income’, which is used to calculate how much tax you pay. The greater your taxable income, the more tax you pay. You can deduct your retirement contributions up to a certain limit, which reduces your taxable income and your tax bill.

What’s the limit? Currently, you’re allowed to contribute up to 27.5% of your taxable income or R350,000 per year, whichever is less.

Give me an example…
Redi earns R35,000 per month and she has no tax credits from medical aid etc. nor does she contribute to a retirement fund. Using current tax rates, she’ll pay about R6,500 per month in tax. In annual terms, she earns a taxable income of R420,000 and faces a total tax bill of R78,000 per year.

She wants to start contributing to a retirement fund and would like to know how much tax she can save. Adhering to the 27.5% limit described above, she can deduct a maximum of R115,500 per year, or R9 625 per month. Her new taxable income will therefore be R304,500 (R420,000 minus R115,500).

But not everyone can afford to contribute up to the limit. Redi manages to budget R3,500 per month to contribute to a retirement fund. Doing so immediately lowers her annual tax bill from R78,000 to R65,000 – a saving of R13,000 per year or R1 080 per month. Another way to see this benefit is to think that she’s saving R2 420 per month of her own money towards retirement, and the government is adding R1 080 per month on top of that.

The more you earn, the more tax you pay – but the deduction benefit is also greater.
Kamvelihle earns R1,2 million per year and pays R244,000 per year in tax. If he contributes R120,000 per year towards a retirement fund (R10,000 per month), he’ll reduce his tax bill by about R49,000. Put differently, he’s contributing R5,900 per month of his own money to his retirement, and the government is adding R4,100 per month.

How much do I need to earn before I have to pay tax? 
If you’re under 65, you don’t pay tax unless you earn R95 750 or more per year (R7,979 per month). This changes for people aged 65–75, and for those over 75.

Source:  22Seven – What’s the deal with retirement funds and tax?

With a Tax Free Savings Account you are able to maximise your investment returns as the interest, capital gains and dividends you earn on these investments are completely tax free.  The max annual contribution is R36 000 with a lifetime limit of R500 000.  Our recommendation is that these investments are utilised as medium to long term savings vehicles.

Do I invest in my retirement annuity or in my tax-free savings account?
The general principle is that investors should first adequately provide to their retirement annuity before any additions to their tax-free savings account. The potential compounded tax saving from contributions to a retirement fund early on in your career overshadows the tax benefits on a tax-free savings account.