The Tax Benefit of Retirement Savings

How to use your retirement contributions to pay less tax

Did you know you can reduce your tax bill at the end of each tax period simply by saving for retirement?

Section 11F of the Income Tax Act provides taxpayers with a tax deduction for any contributions made to any pension fund, provident fund, or retirement annuity fund. The tax deduction you are entitled to is however limited to a certain amount that may be claimed back from SARS each year. The tax deduction you may receive on your retirement contributions is limited to the lower of:

1. R350 000
2. 27.5% of the higher of:

            - Remuneration 

            - Taxable Income 

     3. Taxable Income before taxable capital gains 

Any retirement contributions that are not allowed in the current year, as a result of the limitation, can be carried forward and assessed for a deduction in the following tax year.

Lets see how this deduction works by having a look at a simple example:

Taxpayer John has a retirement annuity (RA) on Easy Equities and contributes R5 000 a month towards this RA. John earns R30 000 a month in remuneration from his employer. For the full 2022 tax period John contributed a total of R60 000 (R5 000 pm x 12) to his Easy Equities RA. He also received R360 000 (R30 000 x 12) as remuneration for the year. Let us assume that John has a taxable income of R400 000 for the year and a taxable income of R380 000 before capital gains.

By applying S11F John would be entitled to a tax deduction in respect of his R60 000 RA contributions but this would be limited to the lower of:

1. R350 000
2. Higher of:

            - R360 000 x 27.5% = R99 000

            - R400 000 x 27.5% = R110 000

     3. R380 000

Therefore, the limitation to Johns deduction is R110 000 (27.5% of his taxable income). However, given that John has contributed R60 000, which is less than the R110 000 limitation, he may claim the full R60 0000 as a S11F tax deduction.

Not only are Retirement Annuities a great tool for saving for retirement but they are also a useful vehicle to lower your income tax and help you receive a nice tax refund at the end of every tax period.