February is the last month of the tax year and you may see lots of offers to invest in either a retirement annuity or a tax-free savings account to save on tax.
It’s only really an option for those who have additional cash in the month of February, which isn’t the case for many who have just survived to the end of Janu-worry.
But it is a good time of year to assess whether you could have made more of the tax deductions you enjoy to boost your retirement savings.
You are entitled to a tax deduction for any contributions made to your retirement fund or funds of up to 27.5% of your taxable income or remuneration, but limited to R350,000. A deduction enables you to reduce the amount of income on which you pay tax. The R350,000 limit is one that will only affect someone earning over R1.2m a year.
For most people, contributing more than a quarter of their income to retirement savings will be a struggle and so you are probably contributing less than the maximum you can contribute and still enjoy a deduction. Most employer-sponsored funds are set up for contributions between 12% and 15%.
This is why if you are one of those rare people with cash to spare at this time of year, you should top up your retirement savings.
If you belong to an employer-sponsored retirement fund or an umbrella fund that your employer contributes to on your behalf, you need to check if the rules of the fund allow you to make an ad-hoc additional contribution in February.
If not, you need to open, or top up, your own retirement annuity.
But, if you don’t have cash now, do the calculation and check it again after the budget later this month to see if contributing a little more each month next year won’t make a difference to the tax you pay.
If you do not already have an automatic increase in contributions set up, ask your employer or your retirement annuity (RA) provider to increase the amount you contribute from March.
Your tax rate and the contribution you make will determine the tax saving.
For example, for this tax year, if you earned between about R200,000 and R300,000 a year, your tax rate is 26% and you can save 26% of whatever you contribute to an RA before the end of February — for example, a R500 contribution before tax year will save you R130.
If you earn between about R300,000 and R420,000 a year, you could have saved 31% of every rand you contributed to your retirement savings — or in the case of a R1,000 top up before the end of February, R310. If you use this saving to further boost your retirement savings, it will enhance your retirement income.
Alternatively, use the tax saving to offset a higher contribution — remember if you save through your employer you get an immediate tax saving on your salary. If you save on your own in an RA, you need to claim the deduction at the end of the tax year and only if your taxes are up-to-date, will you get a refund from the SA Revenue Service...