Wealthy Maths: Tax on retirement contributions

In Latest, Wealthy Maths by Stealthy Wealth

While SARS is more than happy to take their pound of flesh, they also offer some ways to legally reduce your tax bill – they offer tax breaks on retirement annuity (RA), pension fund and provident fund contributions.

So how much can you contribute to get the full tax deduction in a tax year? 

Currently, the rules are as follows:

You can contribute a maximum of 27.5% of your remuneration or taxable income (whichever is higher), and no more than R350,000 to get the full tax deduction. 

Let’s look at some examples:

First up, meet Steve. He earns R380,000 a year and wants to work out the maximum he is allowed to contribute to his retirement savings to enjoy the full tax deduction.

This means Steve can contribute a total of R104,500 to his pension fund or RA, and deduct this amount from his taxable income for the tax year.

As another example, meet future you. You earn a total of R1.5 million a year. Let’s look at your calculation:

27.5% of taxable income is R412,500. However, there’s a cap of R350,000 on the amount you are allowed to deduct. This means future you can only enjoy a tax deduction on R350,000 of the R412,500 you’ve contributed. 

In this scenario, the contributions that exceeded the deduction cap in a tax year will carry over to the next tax year. This means it will be considered as an amount contributed in the new tax year. We also wrote about tax deductions and retirement contributions here.

Our friend Stealthy Wealth knows his way around maths. Luckily for us he also speaks human, which is why we asked him to explain the most important maths we need to know to be good at money. This is not your average maths class. Tune in once a month and turn into a money mathemagician.

http://www.stealthywealth.co.za/

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