By Peter Stephan, senior policy adviser at the Association for Savings and Investment South Africa (ASISA)
South African taxpayers with different sources of income are often shocked when they discover at the end of the tax year that pay-as-you-earn (PAYE) deductions did not cover their tax liability and that they owe money to the South African Revenue Service (SARS).
Pensioners who are not provisional taxpayers* but who receive annuities from different sources are particularly at risk of this happening and often do not have the means to pay the tax due to SARS.
Tax legislation aimed at addressing this problem in part will only come into effect from 1 March 2022.
Until then, the best way to avoid a nasty tax shock at the end of the tax year is to understand your total tax liability when you are not a provisional taxpayer. This will enable you to request that your employer as well as insurance companies and/or retirement funds apply a higher rate of PAYE to your income.
Ensuring that you are appropriately taxed during the year will ease your financial burden and eliminate surprises when submitting your tax return.
Why you could have a shortfall
Taxpayers who are not provisional taxpayers and who have multiple income sources that have already been subjected to PAYE during the year are usually left questioning how they can possibly owe more tax.
The reason is that all of your income is added together to determine your overall tax liability, and since South Africa has a progressive income tax system (as opposed to a flat rate of tax), the tax liability on your total taxable income may be much higher than the combined amount of PAYE that was applied to each source of income.
You earn a salary from which your employer deducts the monthly PAYE in line with the current PAYE tables and your allowable rebates.
You also receive a monthly compulsory purchase annuity from an insurance company arising from the death of your spouse. The insurance company also deducts PAYE on the pension amount paid to you in line with the current PAYE tables and your allowable rebates.
However, your employer and the insurance company are both applying the tax tables and rebates independently on each source of income and not on the combined amount of taxable income.
To make matters worse they are both applying the applicable rebates that you are entitled to when deducting PAYE, but you are only entitled to your rebate(s) once and not for each different source of income.
On final assessment, taxpayers will be taxed on their cumulative taxable income at a much higher marginal tax rate than their individual sources of income. The PAYE deductions, which would have been applied on each individual source of income, will therefore not cover your total tax liability.
Since many taxpayers who have different income sources that deduct PAYE are not aware that the tax deducted is unlikely to cover their tax liability, they have not budgeted for it. Unfortunately, this often leads to delayed payments and therefore penalties, which makes the situation worse for the taxpayer.
Understanding your tax liability
Once you are aware of your overall tax liability, you can approach your employer, insurance company or retirement fund making the income payments and request that a higher rate of PAYE is deducted than what is prescribed by the PAYE tables.
By doing this, you can avoid having to pay in on final assessment.
You can establish your taxable income and your tax liability by using the following formula:
a) Gross Income (e.g. salary, investment income, annuities and/or pensions received)
b) Less Exempt income (e.g. local dividends)
c) Less allowable deductions (e.g. contributions to retirement funds)
d) Add any specific inclusions (e.g. taxable capital gains)
e) Less any assessed loss carried forward from a previous tax year
= Taxable income (or assessed loss)
f) Apply the tax tables to your taxable income
g) Deduct the applicable rebates which are based on your age
= Tax due to SARS or refund due to you
All taxpayers get a primary rebate off their taxes (currently R14 958). In addition, a secondary rebate of R8 199 applies if you are 65 and older. A tertiary rebate of R2 736 applies if you are aged 75 and older.
In effect, because of the rebates applicable to you, you will not pay income tax below the taxable income threshold of:
- Below 65 – R83 100
- Age 65 to 75 – R128 650
- Age 75 and over – R143 850
Don’t wait for legislation
In an effort to assist taxpayers, National Treasury has proposed new legislation which will require life insurers and retirement funds to deduct PAYE without applying rebates. However, since this legislation will only be effective from 1 March 2022, taxpayers should be doing their calculations and requesting their employers, insurance companies or retirement funds to apply a higher rate of PAYE if they do not want to have to pay in later.
Applying these changes now will certainly reduce your financial burden when you submit your 2021 and 2022 tax returns.
* Tax is collected from individual taxpayers by way of pay-as-you-earn (PAYE) tax and/or provisional tax. Provisional taxpayers earn income that is not subject to PAYE and are required to make two provisional tax payments in a tax year, one six months into the year of assessment and one at the end of the year of assessment.
This article was based on a press release issued on behalf of ASISA.