How to (legally and morally) avoid paying tax

The figures around retirement-readiness (financially speaking) should shock us all into action. South Africans have a terrible savings culture, which is part of the reason only 6% of us can afford to retire comfortably. (We’ve written about some of the other reasons here, here and here.)

It’s also why the government encourages and incentivises us to be better savers through carrots similar to those dangled by marketers: spend some money on your retirement savings and you’ll either get a “discount” (through higher take home pay than you’d get without the incentive) or “cashback” (through a tax refund).

This is because contributions to specific retirement products are tax deductible: whatever you put towards a retirement annuity, pension or provident fund comes off what you’re taxed on. So if you earn R500,000 a year and contribute R50,000 to your retirement fund, you’re only taxed on R450,000. (This illustrates the principle only – in reality your tax calculation will likely have other deductions as well.)

At current tax rates, with those numbers you’d qualify for a refund of R18,000, which is a nice not-so-little bonus. And it effectively means your R50,000 contribution costs you only R32,000. (If that’s spread over 12 months and your employer takes your contributions into account when deducting PAYE, it would mean that a roughly R4,000 monthly contribution only costs you R2,500 a month.) Contribute R75,000 instead of R50,000 and your tax refund increases to R27,000.

Put differently, if your tax rate is 30%, then every R1000 you save only costs you R700. Or: your take-home pay would reduce by R700, but a full R1000 has gone toward your retirement savings.

As with many marketing incentives, there are some Ts & Cs. The money has to go into either a retirement annuity, pension fund or provident fund. And there are limits: a maximum of 27.5% of your remuneration or taxable income (whichever is higher), and no more than R350,000, is tax deductible in a tax year. If you contribute more, it’s rolled over to the next tax year.

But the bottom line is that the more you save, the less tax you pay. So people like to maximise those benefits, and often at the last minute. Which is why investment companies like 10X see a rush of contributions in January and especially February, just in time for the end of the tax year.

If you’re looking to fund some extra last-minute contributions to your retirement savings, end of year bonuses come in handy. And when you finally retire, things will be that much more dandy.