Retirement fund contribution vs tax

kolaval

kolaval

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Is there an online calculator where you can see if upping your retirement fund contribution can lower your tax bracket, and hence the tax you pay?
And how it will affect what you get out every month?
Are there alternatives to the company supplied retirement fund (like RA's), and are they worth going for?
 
kolaval said:
Is there an online calculator where you can see if upping your retirement fund contribution can lower your tax bracket, and hence the tax you pay?
And how it will affect what you get out every month?
Are there alternatives to the company supplied retirement fund (like RA's), and are they worth going for?
Click to expand...

It depends on your income. It's basically the income tax you paid on that contribution that gets paid back to you
 
Please fact check anything in my response for yourself as I am not an expert, but can respond based on my personal experience.

Contribution to pension funds, provident funds and retirement annuities reduce your taxable income. As such I would assume that you could potentially be put into a lower tax bracket if you are close to the bracket starting point, but it certainly does reduce the amount of tax you pay. Both now and in future (due to your taxable amounts and rebates being lower after retirement).

You can contribute up to 27,5% or R350 000 max to retirement funding. If you increase your contribution through your company you will likely have less money paid into your bank account as a result of the amount being taken off for the increased contribution, but you will pay less tax. (there could possibly be a small area where optimisation allows for you to get more out due to going into a lower tax bracket, but it will likely not be substantial and may not be possible for everyone).

Generally if you go with a RA separate from your employer you will not get the monthly benefit in the month, but will likely get a refund at the end of the year. I say likely as this depends on what other income you have. I also say generally as you could request a tax directive that would give you the tax benefit in the same month, but this involves some admin from you and the employer and most employers try to avoid this.

Alternatives to company supplied retirement funds are available, but you need to do the calculations based on your specific scenario. Some of the things to consider include:

* Some employer funds (group funds) give additional benefits that private funds don't offer - an example is reduced life insurance (risk products) being included and access to emergency call centres
* Some employer funds limit you to certain investment choices that may impact on your diversification
* There may be noticeable differences in the fees charged in employer vs private
 
It's a "deduction" from your gross income to get to net taxable income. But gross income stays the same and thus it does not affect tax brackets.
 
So even if you theoretically could save half your salary you'd still be taxed on the full one?
 
Yes but splinter claimed that it does not make any difference to your tax bracket, so I asked a hypothetical question
 
Splinter said:
It's a "deduction" from your gross income to get to net taxable income. But gross income stays the same and thus it does not affect tax brackets.
Click to expand...

But it does affect the tax you pay. Say you earn R300 000 gross and contribute 20% (R60 000) to retirement savings, you then only pay tax on R240 000, instead of on R300 000.
 
kolaval said:
So even if you theoretically could save half your salary you'd still be taxed on the full one?
Click to expand...

Using my R300 000 gross income example. If you saved R150 000 into retirement savings, you be taxed on R217 500 (R300 000 X 0.275 = R82 500). The R67 500 over-contributions tax benefit would be rolled over until retirement, or until there are years you do not contribute 27.5% and it would be as if you had contributed 27.5%, with any excess rolling over each year.
 
Man if true that sucks. In the UK, I sacrifice 20% of my salary that goes into my pension. I pay less tax as a result. I had to sign an agreement that my salary would be officially reduced by 20% in exchange for that 20% being paid tax free into my pension fund. Oh and the company contributes an additional 5%. Also tax free.
 
supersunbird said:
But it does affect the tax you pay. Say you earn R300 000 gross and contribute 20% (R60 000) to retirement savings, you then only pay tax on R240 000, instead of on R300 000.
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Yes, of course. I was answering the question about tax brackets.
 
Ancalagon said:
Man if true that sucks. In the UK, I sacrifice 20% of my salary that goes into my pension. I pay less tax as a result. I had to sign an agreement that my salary would be officially reduced by 20% in exchange for that 20% being paid tax free into my pension fund. Oh and the company contributes an additional 5%. Also tax free.
Click to expand...

Doesn't sound dissimilar (end result is the same), except in SA it's not that formal.
 
kolaval said:
Is there an online calculator where you can see if upping your retirement fund contribution can lower your tax bracket, and hence the tax you pay?
And how it will affect what you get out every month?
Click to expand...

You can never get more money per month by increasing retirement savings to move down a tax bracket. If you reduce your taxable income to lets say R423,300 (the line between paying 31% and 36% tax) your monthly pay won't go up, because the amount below R423,300 was ALWAYS taxed at 31%.

Where it makes a difference is that you'll save 36% on the retirement fund (which you can't touch until you're oooold). But that doesn't increase your monthly take-home in any way.
 
Splinter said:
It's a "deduction" from your gross income to get to net taxable income. But gross income stays the same and thus it does not affect tax brackets.
Click to expand...
That's not right. Tax bracket is determined by "Taxable Income" which would be gross income net of any allowable deductions (of which retirement funding is one).

To the OP's question. Yes it can move you into a lower bracket however due to the fact that South Africa has a marginal taxation system, you will not get more out after tax and retirement funding deductions. You will pay less tax overall but that benefit will effectively all go into your retirement savings so your monthly net income will not increase.
 
kolaval said:
How will they be able to do that?
I thought it would only be for state employees.
Click to expand...
Government is considering the implementation of prescribed assets. It will most likely affect all retirement and pension funds. :(
 
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