Once your income is above a certain threshold, you must pay taxes – it’s the law. But there are two straightforward ways to pay less tax: Contribute to a tax-free savings account and a retirement fund.
South Africa does not have a great savings culture, and nobody likes to pay taxes. The government really wants you to save, so it offers you a deal: Save some money for your future and the government will give you a tax “discount”. These “discounts” are called tax benefits.
The first tax benefit is a tax-free savings account (TFSA). The government collects taxes on all income, not just your salary. If you save or invest money, the growth of that money is also taxed.
But in a TFSA, the growth of that money (whether it’s from interest, dividends, or any other type of return) is not taxed at any point, ever.
Nolwazi explains…
That sounds great, what’s the catch?
The government limits how much you can contribute to a TFSA.
The maximum contribution per year: UP TO R36 000 per year (or R3 000 per month)
The maximum contribution in your lifetime: UP TO R500 000. (If you exceed this limit, any extra contributions will be taxed.)
Let’s get practical and look at the difference between a TFSA and a “normal” savings account (like 30-day savings account).
TAX-FREE SAVINGS ACCOUNT
Josie is 21 years old and starts working as an administrative assistant on 1 January 2025. She invests the maximum of R3 000 per month until she reaches the R500 000 limit 15 years later, in 2040.
(We assume a 10% investment return and inflation of 6% per year.)
After 20 years of saving, Josie has about R1 800 000 in savings, as is illustrated in orange in the graph above. Well done, Josie!
“NORMAL” SAVINGS ACCOUNT
If Josie invested the money in a “normal” savings account, after 20 years, she would only have R1 400 000 in savings because of yearly tax deductions (i.e. the money above the green line on the graph). That’s almost half a million rand less!
You don’t have to save R3 000 per month, you can start with as little as R100. Increase the amount as your salary increases. You have a lifetime to contribute, but the sooner you start, the more time your money has to grow.
RETIREMENT FUND
The government also rewards you with a tax benefit if you contribute to a retirement fund.
Nolwazi explains…
It’s tricky, but let’s explain.
Mandla earns R240 000 per year.
His taxable income is R144 250.
He must pay 18% tax, which comes to R25 965 for the year
BUT
Mandla contributes R1 000 per month to a retirement fund.
His total retirement contribution = R12 000 per year
Thanks to the tax benefit, Mandla can deduct the R12 000 from his taxable income. His new taxable income is R132 250 (vs the previous taxable income of R144 250).
Because Mandla contributes to a retirement fund, he pays R2 160 less tax per year.
That might not seem like much, but one day Mandla might earn R1 million per year and pay R10 000 to a retirement fund …
If your employer does not offer a retirement fund, you can still qualify for the tax benefit if you contribute to a retirement annuity (RA). You can claim the tax deduction when you file your income tax return at the end of the tax year. SARS will then pay the amount into your bank account.
Self-employed people are usually provisional taxpayers. They can also reduce their taxable income by contributing to an RA.
Nolwazi explains…
If Mandla’s employer did not offer a retirement fund and he contributed to an RA instead, he would receive a payment of R2 160 from SARS after filing his income tax return.
Further reading
How and why do we pay taxes? (Coming soon)
Sources
News24: Tax-free savings accounts – how to maximise the value of the tax benefit
Funded by
