How Much of My Retirement Annuity Contribution is Tax Deductible?

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We prepared this sheet to provide some clarity around retirement annuity contributions.  The intention is not to provide an opinion, detailed explanations and or calculations, but merely to provide some clarity around current retirement annuity contributions.  Contact us should you require any accounting or tax assistance.  Do not rely on this sheet, this sheet is not comprehensive, tax legislation change on a regular basis and your circumstances may be unique.

 

Current Retirement Annuity Fund Contributions

15% of taxable income from non-retirement-funding income excluding any severance benefits, or

R3 500 less current contributions to a pension fund, or

R1 750,

whichever is the greater, may be claimed as a tax deduction.

Retirement funding income vs non-retirement funding income.

As a condition of employment, certain employers contribute on behalf of its employees towards a pension or provident fund.  The contribution is normally a percentage of the gross salary, bonus, allowances and or benefits (hereinafter referred to as salary).  The salary amount subject to the pension or provident fund contribution calculation, is called the retirement funding income. 

Taxable income received from the employer that is not subject to pension or provident fund contributions, is called non-retirement funding income.  If an employee is not a member of a pension/provident fund or only contributes towards a retirement annuity fund, all taxable earnings will be defined as non-retirement funding income.

An employee whom does not contribute towards a pension or provident fund.

Example 1:

Tim is 40 years old and earns a gross salary of R150,000 per annum.

Tim’s calculation works as follows:

R150,000 per annum income x 15% = R22,500 per annum towards his RA (R1,875 per month),

R3,500 per annum (R292 per month),

R1,750 per annum  (R145 per month)

R22,500 per annum is the largest amount.  Tim can therefore deduct R22,500 per annum for tax purposes. 

The tax savings:

Let’s take a look at the 2014 tax year (1 March 2013 – 28 February 2014).
                >  Without the RA deduction Tim would pay R14,920 in tax for the year.
                >  With the full contribution towards a RA of R22,500 for the year,  

                    Tim would pay R10,870 in tax.

Tim therefore saves R4,050 in tax by contributing R22,500 towards a RA in a year.  The RA therefore effectively costs Tim R18,450 per year.

 Example 2:

Sizwe earns R700,000 per annum placing him in the highest marginal tax bracket of 40%.
Sizwe’s calculation works as follows:

  • R700,000 per annum income x 15% = R105,000 per annum towards his RA (R8,750 per month),
  • R3,500 per annum (R292 per month),
  • R1,750 per annum (R145 per month)

R105,000 per annum is the largest amount, Sizwe can therefore deduct R105,000 per annum for tax purposes.

The tax savings:

Let’s take a look at the 2014 tax year (1 March 2013 – 28 February 2014).
                >  Without the RA deduction Sizwe would pay R197,685 in tax for the year.
                >  With the full contribution towards a RA of R105,000 for the year,

                    Sizwe would only pay R156,557 in tax.

Sizwe therefore saves R41,128 in tax by contributing R105,000 towards a RA in a year.  The RA therefore effectively costs Sizwe R63,872 per year.

But what if you belong to a pension/provident fund with zero non retirement funding income?

Admittedly the tax benefit of owning an RA is much smaller here.
Since all of his or her salary is considered to be retirement funding income, he or she does not qualify for the 15% rule.

Example 3:

Let’s work with Sizwe once more, only this time he belongs to the company’s pension/provident fund and his whole salary is subject to pension/provident fund contributions.  Sizwe contributes R52,500 towards the pension/provident fund.

The calculation is as follows:

  • 15% of his non retirement funding income (Which is Nil)
  • R3, 500 less his allowable pension fund contributions (R3,500 – R52,500 = Nil)
  • R1, 750

R1,750 per year is the largest amount, Sizwe can therefore deduct R1,750 per year for tax purposes.

The tax savings:

Let’s take a look at the 2014 tax year (1 March 2013 – 28 February 2014).
                >  Without the RA deduction Sizwe would pay R188,765 in tax for the year.
                >  With the full contribution towards a RA of R1,750 for the year,

                    Sizwe would pay R188,065 in tax.

Sizwe therefore saves R700 in tax by contributing R1,750 towards a RA in a year.  The RA therefore effectively costs Sizwe R1,050 per year.

Notes:

1. Any excess RA contributions may be carried forward to the following year of assessment.

2. Provident fund contributions made by an individual are not tax deductible.

3. From 1 March 2014, restrictions will be placed on the maximum allowable contributions to retirement funds.