Financial Education

Tax-efficient way to boost savings

In South Africa, there are 2 excellent ways you can get a boost to your savings, courtesy of the taxman. Here is how you can boost your savings.

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Retirement savings

You're allowed to invest as much as 27.5% (up to R350 000 per year) of your annual income into a retirement savings product, and the government won’t charge you income tax on the money you contribute.

These products include a provident fund or pension fund, which your employer may contribute to on your behalf (by deducting a portion of your salary before you're paid each month), or a retirement annuity which you can open as an individual and contribute to directly from your take-home salary.

This means that if you earned R100 000 a year before tax and decided to save 15% of your income (R15 000) towards retirement, you would only pay income tax on R85 000 for that year.

Once you invest in a retirement product/vehicle, you won't be able to withdraw the investment until you reach retirement age. And while you'll have to pay income tax on your investments once you do withdraw, you'll still benefit from decades of growth on money that you would've paid to the South African Revenue Service (SARS) anyway.

To learn more about your specific retirement savings options, and the right retirement plan for your needs, speak to an FSCA-registered financial adviser.

A tax-free savings account

Tax-free savings accounts (TFSA) were first launched in 2015 and are now available through almost every financial institution. Unlike retirement savings, you won’t get an income tax benefit for contributing to a TFSA, but you will never pay tax on any of the returns you earn in these products.

Contribution limits

Whether you invest in one or multiple TFSAs, you're only allowed to contribute up to R36 000 a year, up to a total lifetime limit of R500 000. Be careful to never exceed the annual or lifetime limit. You will be taxed 40% of any extra contributions you make above these limits.

Note that these limits only apply to contributions. The interest, dividends or gains earned in the account won't affect your annual or lifetime limits.

You can withdraw money from your TFSA at any time, but you won’t be allowed to replace the money you withdraw – so once you withdraw, you lose the opportunity for tax-free earning on that money forever.

Tax benefits

You won’t pay any tax on the returns you earn in a TFSA account, including interest income tax, capital gains tax or dividend tax. In the short term, this benefit won’t feel noticeable, but over time the impact is significant.

Types of account

You can choose to open a TFSA with your bank and earn interest on cash deposits. You can also open a TFSA that lets you make long-term investments in unit trusts.

The product you choose should meet your personal needs and risk appetite. Remember that the longer you can leave your TFSA contributions untouched, the more significantly you will benefit from the tax saving (because the more time you can give your money to grow, the greater your tax savings benefit will be). For this reason, it makes sense to use your TFSA allocation for long-term investment goals.

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