Stian de Witt, CFP®, Executive Head of Financial Planning at NMG Benefits
South Africans are notoriously poor savers, but it doesn’t have to be that way. By using the various tax incentives available to us, we can not only save more, but make our money work harder for us.
Last month’s budget speech already contained some tax relief for embattled consumers. The personal tax threshold for people under the age of 65 was raised from R91 250 to R95 750, while medical tax credits were raised to R364 per month for the first two members and to R246 per month for any additional members.
If you understand the tax breaks available to you, and construct your investments in a strategic manner, you can reduce your tax liability, optimise your returns and save more, says Stian de Witt, CFP®, executive head of financial planning at NMG Benefits. But to do this, you need to understand how the different tax incentives work, and how you can use them to your benefit.
Tax-free savings investments
A tax-free savings account allows you to put away R36 000 a year, up to a lifetime maximum of R500 000 – and all interest, dividends and gains are 100% tax free. Your money is easily accessible, and can usually be withdrawn within days, but it’s better to keep your funds invested for as long as possible, because all returns are tax free and you can benefit from the compounding of annual tax-free returns, says de Witt.
Retirement annuities
A retirement annuity is a personal retirement fund savings vehicle that offers significant tax benefits both before and at retirement. You can claim back tax on your contributions up to 27.5% of your taxable income per year, up to R350 000.
At retirement, up to one-third of your fund can be taken as a lump sum, while the balance must be used to purchase a pension or annuity. If the total value of the investment is below a certain amount, the full value can be taken as a lump sum. Tax is only paid on the withdrawal of retirement annuity capital at death, disability or retirement. The Budget Speech saw the tax-free retirement amount raised to R550 000, while the tax-free withdrawal amount will rise to R27 500.
Solar panels
The budget speech contained a once-off tax rebate for individuals looking to install solar panels at their homes. Private households that install rooftop solar panels from 1 March 2023 will be able to claim a rebate of 25% of the cost of the panels, up to a maximum of R15,000. This can be used to reduce your tax liability in the 2023/24 tax year. But move fast: this incentive will be available for one year only.
Donations tax benefits
If you make a bona fide donation to a registered non-profit organisation, you can qualify for a tax deduction if they can give you a Section 18A certificate. The deductible portion of the donation is capped at 10% of the taxable income of the donor. If you are donating to a registered non-profit organization, make sure to get your Sec 18A certificate.
Endowments
An endowment policy is a tax-effective savings vehicle with a minimum investment period of five years. Investors can either make a lump sum contribution or pay regular premiums. Tax on investment income is withheld by the administrator at a rate of 30% for individuals, and 28% for companies or closed corporations. For trusts, the tax rate is based on the classification of the beneficiary, says de Witt.
Preservation funds
A preservation fund is an investment vehicle where you can ‘park’ your pension or provident fund pay-out when you change jobs without paying tax on the transfer amount. There is no tax payable on interest earned, dividends received, or any capital gains realised when the units are sold. Tax is only paid on the withdrawal of capital, with a certain portion of the lump sum withdrawal tax free.
“These aren’t the only savings vehicles available, but they are some of the more popular options. If you’re not sure which vehicle is best suited to your personal circumstances, speak to your financial adviser,” says de Witt.
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