Stop bleeding R22,000 to SARS every February

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of 10X Investments.

Every February around this time, I get incredibly resentful about tax. Even more resentful than I was when that wonderful young man sideswiped me on the freeway and then ducked down the nearest exit.*

February is when I have to pay my tax. It’s when the money I was diligently putting into an investment account – where ironically, I get taxed again – needs to be pulled out and paid over.

Being a provisional taxpayer, I need to pay the man-with-braces-and-a-pen-in-his-pocket twice a year. The first payment, due at the end of August, doesn’t hurt that much. The second instalment, the one due now now, does.

What makes this resentment especially acute is the paperwork. I need to type my logbook into a neat spreadsheet. And this generally involves a visit to my pharmacist for tax season headache tablets that help remove the pain from the process of unscrambling my writing.

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But wait. I actually don’t have to pay SARS if I’m clever about it. The smart money – see what I did there – is on putting more away into my retirement annuity each month before I get here. Because retirement contributions are tax-deductible, the more I plug into my retirement annuities, the less tax I pay.

Up to a limit, of course. That limit is up to 27.5% of your taxable income, and there’s an absolute cap of R350,000 per year. So, it’s whichever is the lower figure: either 27.5% of taxable income or R350,000. It’s worth pointing out that you can’t do any fancy accounting. You cannot calculate the deduction, subtract it, and then apply it again. I know you wondered.

The good news, however, is that you can hit your limit – on an annual income of R512,800, that would be R140,520 – and carry over as a ‘disallowed contribution’ any extra you invest.

Useful if Aunt Meredith dies and leaves you R1 million (which is quite stingy if she was worth billions and only leaves you a bar) because you can put that entire R1 million into an RA, and those disallowed contributions can be carried forward and help offset income you draw from those savings in future.

So if you were retired, with millions inherited from Aunt Meredith safely invested, those disallowed contributions would negate the tax wou would have paid on income drawn from those funds… almost indefinitely. Or at least, until you finally exhaust that amount. It’s called Section 10C of the Income Tax act, and there’s a great article on it here.

While I’ll get to retirement income and tax shortly, because it’s important, this entire stinking-rich-through-inheritance conversation is rather pointless for me. I don’t have an Aunt Meredith. Or an Aunt Anyone worth a thing.

Back to reality.

Let’s say I earn R512,800 a year – which is a number I chose because it is the top end of one of the taxable income categories and this is about the middle of what is defined as ‘middle-class’ in South Africa.

If I was putting away 15% of my income (before tax and other grudge deductions) each month, I’d be saving R22,000-odd a year in tax. That’s a fair amount. It’s almost R2,000 a month.

But, you say after spluttering into your coffee, that’s R77,000 a year into an RA, and that’s a LOT more money than the saving, so why not spend it while I have it, eh? After all, the only two things guaranteed in life are death and taxes.

(Attributed to Benjamin Franklin, who in 1798 wrote a letter to French scientist Jean-Baptiste Le Roy saying, “in this world nothing can be said to be certain, except death and taxes”. Or so Google tells me.)

Let’s look at this from another angle: for every R1 saved into an RA today – assuming the same income and percentage contribution as above – it actually only costs me 69c out of pocket because of the immediate tax saving.

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Plus, while invested, that money earns grows via interest and dividends without any tax – a topic I covered last month, which for your reading pleasure is here.

Which brings us back to what I said I will address: you do pay tax when you start drawing out your RA (in the form of a living annuity) when you retire. Yup, you pay tax. But, usually not at the same rate because it’s generally a lower effective tax rate. And not at all if you’ve over-contributed.

Let’s recap: February doesn’t have to hurt this much. For every R1 you put into an RA today, it only costs you 69c out of pocket – and that money grows tax-free until retirement.

So instead of watching R22,000 disappear to SARS this February, what if you redirected R77,000 into your RA throughout the year? You’d save that R22,000 in tax and build real wealth for retirement.

The man in braces still gets his cut eventually, but you end up with substantially more. Talk to the clever people – they’ll help you maximise these investments, so February starts feeling a whole lot better.

*I’m (mostly) ok. A bit eina and very annoyed, but ok. And we tracked the wonderful young man’s name and address down. Witbank, my dude, is not such a big place hey. I’m coming for you!