Question:
I currently receive a monthly government pension on which I do not pay tax. This pension, when added to my taxed salary, puts me in another income tax bracket, which means that at the end of the tax year I have to pay in approx. R10 000.00 to SARS. What is the best way to offset this payment? Could I make a salary sacrifice through my employer and pay R900.00 per month into my provident fund, thereby offsetting the payment made to SARS, as this will the be a tax deduction?
Answer:
Keith,
Increasing your provident fund contribution is one way to reduce your tax liability (if structured as a salary sacrifice). However, to benefit, you must remain with the present legal deductible limit, which is 20% of your pensionable income (in 2015, this will change to 27.5% of your gross remuneration or taxable income).
Contributing an additional R900pm will however not fully offset your tax liability. By contributing R900 pm (R10 800 pa), you will only save tax of (R10,800 x your marginal tax rate). If this rate is say, 25%, you will only save R2,700 of tax. Divide your year end tax liability by your marginal tax rate (eg R10 000/0.25 = R40 000 or R3 333 pm) for a sense of how much extra you would have to save through the provident fund, to fully offset your tax liability.
