With the holidays in full force financial fundis have warned consumers to avoid the pitfalls of blowing their Christmas bonuses to avoid the dreaded Januworry.
Tempting as it is to spoil oneself and loved ones this time of the year Salem Nyati, consumer financial education specialist at Momentum Group, said making questionable financial decisions should be avoided.
Nyati said while there are many smart ways to spend bonuses, there are just as many pitfalls to watch out for, not just for bonuses, but inheritances and any other windfalls one may receive.
“Spending all your bonus money, at once, for short-term pleasure and potentially on the wrong things is the worst pitfall, which is partly the result of not having a financial plan. To get the most out of your money, the best thing is to spend on things or experiences you enjoy that will add value to your life. In fact, as soon you know how much you will get for your bonus, determine exactly where that money will be going,” she said.
Spending all your bonus money, at once, for short-term pleasure and potentially on the wrong things is the worst pitfall, which is partly the result of not having a financial plan.
— Salem Nyati, a consumer education specialist
Nyati recommends the key priorities when getting a bonus should be paying off debt, adding to your emergency fund and retirement and, in the case of parents, looking at back-to-school essentials.
She said coupled with a little planning ahead, developing financial plan helps you understand and control your cash flow and subsequently allows you to enjoy a well-deserved break this festive season without added stress.
“This approach provides you with better control over your budget and helps improve your financial lifestyle. Essentially, having a financial plan is a necessity, especially when considering that many South Africans are financially stretched; making it difficult to focus on saving opportunities that could improve their overall financial wellbeing,” said Nyati.
Gladness Mashilo and Jordan Mulindi, tax legal and accounting specialists at Latita Africa, said understanding the tax implications will go a long way towards making bonuses stretch further.
“Understanding how these changes work will ensure that the joy of receiving a bonus isn’t overshadowed by unexpected tax surprises,” they said.
They said bonuses are taxed at your marginal tax rate, which is determined by your total annual taxable income.
“When a bonus is added to your regular income, it temporarily increases your taxable income for the month, which can push you into a higher tax bracket. PAYE is then calculated on this higher income for that specific month. For example, if your monthly salary is R30,000 and you receive a R20,000 bonus, your total taxable income for the month becomes R50,000.”
Mashilo and Mulindi say the PAYE deduction is based on this combined figure and could result in a higher tax amount than usual. This adjustment is temporary so any overpaid or underpaid tax will be reconciled when you file your tax return.
However, it does not mean that you are now being taxed more on every rand you have earned — only the extra income would be subject to a higher marginal tax rate. So, while enjoying your festive season, remain tax savvy.
They said non-monetary tax-free incentives like gifts and rewards aren’t included as part of your taxable income unless they meet the criteria to be classified as “fringe benefits”. These exclusions help reduce the tax burden for employees enjoying certain perks.
The concept of taxing bonuses also applies to other forms of additional income, such as annual leave payouts and cash gifts. For example, if an employee receives a payout for unused leave days, this amount is added to their taxable income and could affect their marginal tax rate.
“To avoid festive tax stress, stay tax compliant and ensure that your tax returns are filed on time,” said Mashilo and Mulindo. They advise that filing correctly can help you recover any overpaid tax or claim entitled refunds.
“It’s also crucial to consult with a tax practitioner if you are unsure about your compliance status or have questions about your PAYE calculations. Of course, it also pays to stay aware of any underpayments as well.”
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