A person needs to save money today in order to make sure that when they do retire they will have enough income to live off.
A simple fact is that people don’t save enough money. When people do have money, it gets spent. Most people don’t take the time to plan and save for their future. What we’d like to do is to educate and explain how the government is trying to encourage us to save more money.
The government offers us a tax incentive by putting money away for our retirement and we’d like people to take advantage of this offer. We’ll explain below how this tax incentive works.
How the tax benefit works
An individual may contribute up to 27.5% of their non retirement funding income towards a retirement annuity to a maximum of R350 000 per annum. By doing so the 27.5% contribution becomes tax deductible.
A tax deduction reduces a persons taxable income and in doing so means that a person should pay less tax. (sometimes when we do our tax returns we are able to get some money back from SARS, this is because of our tax deductible expenses)
Our contribution towards our retirement plans are either fully or partially tax deductible meaning that we will be able to get a kick back from SARS when we do our tax return.
How much do we get back?
Now the percentage that you get back depends on the marginal tax bracket that you fall in. That is determined by your taxable income.
If person A earns R40 000 per month he will earn R480 000 per annum. That will therefore put him in a 36% tax bracket according to the latest tax tables (2018/19).
This person is allowed to contribute R132 000 (27.5% of NRFI) to their retirement for the year. In doing so they will receive a portion of the R132 000 from SARS.
The portion they receive from SARS is linked to the tax bracket that they fall in. Person A will therefore receive 36% of their retirement contributions from SARS when they hand in their tax return forms.
Which means that if they contributed the full 27.5% to their retirement (R132 000) when they do their tax return they will receive a kick back from SARS for an amount of R36 300.