February marks the end of the tax year for South Africans, and there are a number of things you can do to be smarter about your tax.
However, please note: I am a taxpayer and not a tax professional.
You may want to consult a tax professional around your personal situation.
If a tax professional is out of your reach, chat to Sars.
I have only ever found them to be very friendly and extremely helpful (even offering pointers on how I could reduce my tax liability).
First up is the contribution to the pension scheme you’re involved in. This could be your employer’s pension or provident scheme and/or a personal retirement annuity (RA).
The first 27.5% or R350 000 (whichever is smaller) of your income can be paid into a pension scheme and will be deducted from your taxable income.
You can pay in more, but if you exceed these limits, you won’t receive the tax benefit.
For example, if you’re earning R400?000 a year, you would pay tax of some R79 000.
However, if you contributed your full 27.5% (or R110?000) into your pension scheme you would only be taxed on income of R290 000 and pay tax of around R46 000 – a saving of R33 000.
Some important points: Firstly, if your employer also contributes to your pension scheme on your behalf, this is included in your 27.5% or R350 000.
Secondly, remember that the tax year runs from 1 March to end February and you can make a lump sum contribution before the end of February for inclusion in the current tax year.
Do take note that, while you can belong to multiple schemes, the contribution bracket is across all schemes you may belong to – and not per scheme.
Lastly, while I have had a hate-hate relationship with RAs due to their excessive fees and horrid performance, the new-age, passive and low-cost RAs are good products, albeit there are restrictions on when you can withdraw money from them and what you can do with that money, as 66.6% has to remain invested in an annuity.
You can also make sure your tax-free investment accounts are maxed out for the year.
The annual limit is currently R33 000.
While this is money you contribute after you’ve been taxed – as I mentioned above – you can use your pension tax savings to generate R33 000, which could then go into your tax-free investment.
Essentially, you’re getting Sars to fund your tax-free investments.
If you haven’t yet paid the full R33 000, and are able to do so, I would advise that you make the payment before the end of February in order to utilise the full amount, if possible.
Then there is capital gains tax, whereby the first R40 000 of your annual capital gains is tax-free – thereafter 40% of any remaining capital gains is taxed at your marginal tax rate.
Remember that before applying your R40?000 exemption, any capital losses you may have had can be offset against your capital gains for the tax year.
I do want to make it clear that you should be careful not to make investment decisions based on the tax implications.
Especially when it comes to selling just to generate a loss that you want to offset against a gain elsewhere. Buying and selling decisions need to be made based on their own merit.
That said, if you are holding a very poor stock and you’re thinking about exiting – but are loathe to take the loss – this is an opportune time to do so and potentially reduce the pain of the loss.