RA's for dummies...

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shadow_man

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I've been noticing that a few forumites have been punting RA's recently.

The reason being, that you can contribute up to 27.5% of your salary to said RA and claim up to the 27.5% back at the end of the tax year. This is obviously a huge tax break as the rest of your salary should then in effect be taxed at a much lower bracket (depending on your contribution of course).

Now the maths:

Earn: R30 000 pm / R360 000 pa
Tax: R5703 pm / R68 436 pa
RA Contribution (let say 20%): R6000 pm / R72 000 pa

Am I correct in stating that my monthly tax amounts won't change. I'll still be paying the tax I was (per month) before contributing BUT at the end of the tax year i'd now be due a refund of R72 000 for the R6000pm contribution i've been making?
 
jsheed_sa said:
I've been noticing that a few forumites have been punting RA's recently.

The reason being, that you can contribute up to 27.5% of your salary to said RA and claim up to the 27.5% back at the end of the tax year. This is obviously a huge tax break as the rest of your salary should then in effect be taxed at a much lower bracket (depending on your contribution of course).

Now the maths:

Earn: R30 000 pm / R360 000 pa
Tax: R5703 pm / R68 436 pa
RA Contribution (let say 20%): R6000 pm / R72 000 pa

Am I correct in stating that my monthly tax amounts won't change. I'll still be paying the tax I was (per month) before contributing BUT at the end of the tax year i'd now be due a refund of R72 000 for the R6000pm contribution i've been making?
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No. You will be taxed on R24 000 per month (R30 000 - R6 000) instead of R30 000. Did you really think SARS would let you "make" money from them....? :P
 
Cpt.SpAce.Cowboy said:
No. You will be taxed on R24 000 per month (R30 000 - R6 000) instead of R30 000. Did you really think SARS would let you "make" money from them....? :P
Click to expand...

Fair point. I'm clueless, hence i'm asking! :P

Thus far i've just chucked money in to a bond - just looking to make whatever else work, that I can.
 
Nope.

You will get R72000 deduction on your taxable income and at the end of the day you will get a tax credit amounting (72000x 0.31)
 
Cpt.SpAce.Cowboy said:
No. You will be taxed on R24 000 per month (R30 000 - R6 000) instead of R30 000. Did you really think SARS would let you "make" money from them....? :P
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No, he's putting it in proper terms.

He will get taxed on R30k, at the end of the tax year when he does his tax return he will receive a refund of R72k

edit:beaten to it by bruwer :)
 
jsheed_sa said:
Fair point. I'm clueless, hence i'm asking! :P

Thus far i've just chucked money in to a bond - just looking to make whatever else work, that I can.
Click to expand...
Just take note that you will have to pay that money back when you retire :twisted:
 
YingYang said:
No, he's putting it in proper terms.

He will get taxed on R30k, at the end of the tax year when he does his tax return he will receive a refund of R72k

edit:beaten to it by bruwer :)
Click to expand...

No, you will not get a refund of R72k. Your refund will be whatever tax you paid on that R72k (so roughly R24k).
 
You will be taxed monthly on the R30 000. You will get the R72 000 back when you do e-filing (or manual filing) the next year.

Remember the 27.5% limit includes all pension/provident funds you are in as well as RAs. With the pension/provident fund you get the tax benefit every month because your employer knows what your are contributing.
 
Jehosefat said:
No, you will not get a refund of R72k. Your refund will be whatever tax you paid on that R72k (so roughly R24k).
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So if he earns R360 000pa and contributes R72 000pa (20%) to a retirement fund he will not get that R72 000 back? He will only be taxed on R288 000pa.

Yes, that's correct. He will then receive a rebate on the tax already paid.

Yes, you are correct, I was wrong earlier.
 
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supersunbird said:
You will be taxed monthly on the R30 000. You will get the R72 000 back when you do e-filing (or manual filing) the next year.

Remember the 27.5% limit includes all pension/provident funds you are in as well as RAs. With the pension/provident fund you get the tax benefit every month because your employer knows what your are contributing.
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No he won't? What the...

Look, it's pretty simple. If your employer's payroll isn't too crap, they'll load your RA contribution, on which you will not be taxed.
If your employer's payroll is crap, you'll get taxes on your gross salary (let's forget other deductions for now), for which you will receive a tax credit when you do your return.
The tax credit would be equal to whatever tax you paid on the 6k per month.

There is no way he will receive 72k back in the form of a tax credit. That's his total contribution for the year. If his marginal tax rate is say 30%, he'll receive roughly 30% of 72k, or around R20k back as a tax credit.
 
Messugga said:
No he won't? What the...

Look, it's pretty simple. If your employer's payroll isn't too crap, they'll load your RA contribution, on which you will not be taxed.
If your employer's payroll is crap, you'll get taxes on your gross salary (let's forget other deductions for now), for which you will receive a tax credit when you do your return.
The tax credit would be equal to whatever tax you paid on the 6k per month.

There is no way he will receive 72k back in the form of a tax credit. That's his total contribution for the year. If his marginal tax rate is say 30%, he'll receive roughly 30% of 72k, or around R20k back as a tax credit.
Click to expand...

I was wrong, my post has been modified. Been a long day.
 
supersunbird said:
So you are saying 27.5% of ones income is not tax deductible if used for retirement funds?

So if he earns R360 000pa and contributes R72 000pa (20%) to a retirement fund he will not get that R72 000 back?
Click to expand...

No, you misunderstand what I said. The RA contribution is tax deductible. But that means you don't pay tax on that portion of your income, not that SARS pay you to save for retirement.

In his example. If you earn R360k and have no retirement savings you pay R68k tax for the year. If you save the R6k per month then you would have needed to pay R46k tax for the year. So if you had paid the R68k you would get R22k tax back.
 
Supply your employer with proof of the RA contribution, and you won't have to wait a year to get the tax credit back. You will get it back every month as a reduction in your employees tax deduction. Then you can earn interest on your money and not SARS.
 
Anyone have a calculator where I can find the sweet spot of contributions paid vs tax saved?

Thanks for all the replies guys, going to have a proper read later.
 
jsheed_sa said:
Anyone have a calculator where I can find the sweet spot of contributions paid vs tax saved?

Thanks for all the replies guys, going to have a proper read later.
Click to expand...

The more you save the more you get back, so 27.5% (or R350 000pa max) of your income is the sweet spot I'd think...
 
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