IN A NUTSHELL If you withdraw money from your savings pot, the amount paid into your bank account will be less than the amount you applied for. This is because two-pot withdrawals are taxed and may include administration fees. We explain how this tax works — and how to avoid surprises at the end of the tax year.
So, you’ve applied to withdraw from your savings pot, but the amount that appears in your bank account a few days later is less than expected. What happened?
Tax happened.
Two-pot withdrawals are taxed as income, using the PAYE tax tables (not the retirement lump-sum tax tables). This means the withdrawal is added to your taxable income for the year and taxed at your marginal tax rate.
What is a marginal tax rate?
Your marginal tax rate is the percentage of tax you pay on the last portion of your income. This is the rate the South African Revenue Service (SARS) applies to extra income such as overtime, bonuses — and two-pot withdrawals. Let’s look at Puleng who falls into the second tax bracket and has a marginal tax rate of 26%.
How are savings pot withdrawals taxed?
When you withdraw from your savings pot, SARS treats it as extra income in that tax year. The retirement fund must deduct tax upfront, based on your marginal tax rate, and pay it to SARS on your behalf. Let’s look at what happens if Puleng withdraws R10 000 from her savings pot.
IMPORTANT In an ideal world, you should try to leave your savings pot untouched so that the money can continue to grow tax-free inside the retirement fund until you retire.
When withdrawals push you into a higher tax bracket
Things become more complicated if a savings pot withdrawal pushes part of your income into a higher tax bracket – you might get a surprise at the end of the tax year. SARS might tell you that you owe them some tax. (Importantly, not all your income is taxed at the higher rate — only the portion above the threshold.) Look what happened to Aliyah.
Still with us? In a “normal” year, with no two-pot withdrawals, Aliyah pays only R23 805 in tax for the year. But what happens when she withdraws money from her savings pot during the tax year?
If you’re thinking about withdrawing, make sure you don’t get the same nasty surprise at the end of the tax year that Aliyah did.
How to avoid tax surprises
- Estimate your total income for the tax year before making a withdrawal. Check whether the extra income might push you into a higher bracket for the tax year.
- Understand your marginal tax rate.
- Ask your fund or HR how much PAYE will be deducted upfront.
- Don’t spend the full withdrawal — set aside a tax buffer in case SARS recalculates your tax at assessment.
Further reading
Tax and Two-pot
Understanding tax thresholds and rates
Sources
TaxTim: Two-pot retirement system and its tax effects
