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Each financial year comes with a newopportunity to invest in your future and optimise your tax benefits. You can dothis by opening or topping up a retirement annuity and/or a tax-free savingsaccount. Let’s discuss both of these options.
Money invested into a retirement annuity is deductiblefrom tax.
Every financial year, an individual taxpayercan contribute up to 27,5% of their taxable income or annual remuneration(whichever is the highest) across their retirement funds. This tax benefit is cappedat R 350 000 per year. Any contributions above this amount will be carriedover to the next financial year.
Keep in mind that these tax benefit limitsapply to all your retirement funds combined, including:
· provident funds
· pension funds
· retirement annuities.
To illustrate, let’s say you earn R500 000 p.a.Calculating 27,5% of this amount will bring your retirement tax benefit limitto R137 500. If you invest this entire amount, you will be taxed only on theremaining R362 500 of your earnings (if no other tax deductions apply). We cantake this illustration further by saying you contribute R24 000 per year to apension fund through your employer. Subtracting this from your tax-deductiblelimit of R137 500 leaves you with a maximum of R113 500 to contribute to aretirement annuity.
In other words, using the retirement annuitytax benefit means paying less to SARS while boosting your retirement savingsfor the long term.
In South Africa, an individual is entitled to contributeup to R36 000 per tax year and R500 000 over their lifetime to investmentproducts that attract no tax on interest, dividends or capital gains. Thesebenefits translate to the significant long-term growth of your investments.
So, let’s say you contribute your maximum limitof R36 000 a year to a tax-free savings account until you reach your limit of R500000 in 14 years. Given an investment return of 10% per year, the futureinvestment value by the end of year 20 (if no withdrawals were made) will bejust under R2 million.
As we are nearing the end of the currentfinancial year, it is a great time to consider which portion of your monthlyearnings you should invest to optimise your tax benefits in the newfinancial year. Any year in which you do not use these benefits, you forfeitthem.
Our specialised team at Huysamen Westraad Inc.will gladly consult you in organising your personal finances to gain more taxbenefits while meeting your specific needs. Do not hesitate to get in touch with us.
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