If you were unpleasantly surprised by the tax bill on your 13th cheque, change the way you structure your salary package so you lessen the tax impact.
According to Jetro Malapane, member of the Executive Committee of the South African Payroll Association (SAPA) it is important to understand the difference between a 13th cheque and a performance bonus.
“A 13th cheque is essentially an additional monthly salary paid, or 8.33% of the employee’s annual salary that gets paid to the employee (normally in December, but it can be in any other month, depending on the employer’s contract.)
“A performance bonus, however, is based on an employee’s individual performance and it is subject to the employer’s conditions as stipulated in your employment contract,” says Malapane.
Tax provisions and considerations
An annual bonus becomes part of your total taxable income for the year, which may impact your tax bracket, so tax provisions should be made. Malapane says that if your contract stipulates that you will receive a 13th cheque, then monthly contributions can be made as part of your salary deductions to offset the tax implications of this annual bonus.
“A 13th cheque is a guaranteed extra amount that you need to make tax provisions for. Speak to your payroll department to adjust your monthly contributions so that you contribute extra towards your tax each month. Doing this allows you to enjoy your bonus in full in December. ”
The start of a new year is a good time to speak to your payroll department so that you can have this in place for this year.
When it comes to a performance bonus, however, it isn’t possible to make a tax provision in the same way.
“Since a performance bonus is discretionary, it’s not possible to know how much money you must set aside for tax. The payment of performance bonuses is seldom guaranteed, and employees shouldn’t rely on the payment of these discretionary bonuses simply because they received the bonus over the past few years,” says Malapane.
Shift towards rewarding performance
Many South African companies now offer employees performance bonuses instead of 13th cheques.
Not only are performance bonuses seen as more motivating for employees, but these bonuses can be amended based on various factors, such as how the company performed in the past financial year.
“Companies have come to believe that offering employees a 13th cheque as part of their salary package creates a sense of entitlement surrounding bonuses. A performance bonus, however, allows a company to take stock of its financial performance before the money is divided on a departmental or individual level.
“High performers often find that they receive a salary increase as well as a performance bonus in December, which is obviously welcome news before the holidays,” says Malapane.
You should carefully read your employment contract so that you fully understand your remuneration at the end of each year and can make the necessary tax provisions.
This article first appeared in City Press.