In terms of present legislation, only the employer may claim deduct contributions to a provident fund, both employer and employees may deduct contributions to a pension fund, and only individuals can claim contributions to a retirement annuity fund. That’s all very confusing, so the retirement reforms propose to standardise the treatment of contributions. In future, only the individual (either employed or self-employed) may deduct contributions to a retirement fund.
This holds even if the company makes the contribution – the employee still gets to deduct this contribution. However, to ensure the employee does not get a double tax benefit, the company contribution is taxed a s a fringe benefit. This offsets the benefit of the tax deduction received by the employee.
To illustrate by way of an example: say the company pays a salary of R8 500 and also make a contribution on behalf of the employee to a provident fund of R1 500. The employee is taxed on R8 500, the company deducts the R1 500 contribution. Income tax on R8 500 is R2 550, so the employee takes home R5 950.
| Current Regime | Untaxed provident fund company contribution | Taxed remuneration | |
|---|---|---|---|
| Cost to company | 10000 | 1500 | 8500 |
| PAYE | 30% | 255 |
| New Regime | Taxed provident fund company contribution | Remuneration | |
|---|---|---|---|
| Cost to company | 10000 | 1500 | 8500 |
| less: employee deduction for company provident fund contribution | 1500 | ||
| Taxed remuneration | 7000 | ||
| Fringe benefits tax | 30% | 2550 | |
| PAYE | 30% | 5950 | 210 |
| SUMMARY | Old | New |
|---|---|---|
| Remuneration | 8500 | 8500 |
| Fringe benefit tax | 450 | |
| PAYE | 2550 | 2100 |
| Take-home pay | 5950 | 595 |
Deduction will be based on gross remuneration, not pensionable salary
In terms of the retirement reform, which come into effect on 1 March 2015, employees will be allowed to deduct up to 27.5% of the larger of gross remuneration or taxable income, with an annual cap of R350 000. At the maximum contribution rate (27.5%), this cap would be fully utilised at annual gross remuneration (or taxable income) of R1.273m. Deduction will be based on gross remuneration, not pensionable salary
Importantly, the contribution rate will be applied to gross remuneration, not to salary. To explain this semantic difference by reference of the previous example: currently, the deduction would be based on the employee’s pensionable salary of R8 500 and the deduction would be capped at R2 338. In terms of the proposed reform, the employee’s deduction would be capped at 27.5% of R10 000 (R8 500 plus R1 500), which would increase the deductible contribution to R2 750.
In other words, the proposed reforms create a higher deduction base. Of course, very few contribute at a rate of 27.5%. At 10X, we recommend a contribution rate of at least 15% (net of deductions). On that basis, employees with gross remuneration up to R2.33m pa would covered by the R350 000 pa cap.
Note that this cap includes the cost of any approved risk cover.
