It’s been bemoaned by parents, teachers, the government, your boss, the financial adviser. Start contributing as much as you can to your retirement as soon as you can. But, who can think about being 56 when you’re, say 26, with little expenses and lots of new salary. Retirement shmeshmirement (yes, we just made that word up).
Why Pay More When You Can Contribute More?
I’m sure we all had a moan-and-groan earlier this year when it was announced that everyone, in every tax bracket, would be paying more tax. But, considering the state our economy was already in, we commend former finance minister, Pravin Gordhan, for doing the best with what he was given.
Yet, having to pay more tax is a real nice incentive to learn how to pay less tax, if you know what we mean. Wink, wink. Maximising your retirement contributions is one way you can do that.
How To Maximise Your Retirement Contributions
Previously, there was a lot of complicated rules and ‘three different calculations’ for maximising your retirement contributions. And, by maximising, we mean paying yourself more, and SARS, less. But, the government came to their senses and realised that we, mere mortals, prefer less jargon, and more sense. Jargon shmargon (okay, we’ll stop).
Now, it’s easy. You can get a tax rebate, equivalent to the percentage your income is taxed, off your retirement contributions. Provided your retirement contributions are less than 27,5% of your total remuneration. This is regardless of the tax bracket you’re in. So, the higher the tax bracket you’re in, the higher the rebate.
Let’s make it even simpler. If you’re in the lowest tax bracket, earning R189 880 per annum (or below), you’re being taxed 18% of your income. You can claim 18% of whatever you’re contributing to your retirement annuity, provident, or pension fund – up to a maximum contribution of 27,5% of your income.
So, 27.5% of R189 880 is R52 217 (or R4 351.42 per month). If you contribute that amount to your RA, you can claim a R9 399.06 rebate from SARS, maximum. Obviously, the higher you’re being taxed, the more beneficial it is to contribute the full 27.5% (because the percentage you can claim back is higher).
Now you may be thinking, that’s not worth the lifestyle adjustments required to increase your retirement contributions. But, you’d be robbing yourself.
You see, whether or not you contribute 27.5% of your income, SARS gets your 18% of R189 880. That’s R34 178 of your hard-earned money. All you have to do, to get at least R9 399.06 of that back, is contribute R4 351.42 of your R15 823.33 monthly remuneration to your own retirement annuity.
SARS is literally paying you to pay yourself. Enough said.