Much is written about the importance of saving….by putting away a little every month (be it R100, R1000 or more) you (here I am talking about natural persons and not companies or trusts) can accumulate some funds for things you might need later in life. And those savings tend to grow themselves. Generally, the money that you save has already been subject to income tax so you want to make sure that you limit the amount of tax you pay on the savings.
So, what can you do with as little tax as possible?
Firstly, you can put money into a normal interest-bearing account and any amount of interest earned on that account up to R23 800 (if you are over 65 this figure is R34 500) will be tax-free. Remember: any amounts of interest earned above these figures will be added to your other taxable income and tax paid.
If you are likely to use up this tax-free amount or, alternatively, you can invest up to R33 000 a year (up to a total of R500 000 in your lifetime) in a special tax-free investment account that many banks and investment houses offer. It’s important that you don’t exceed the R33 000 in the year because any additional amount will be subjected to tax at 40% (which makes the investment very expensive).
The special tax-free investment accounts on offer can be interest-bearing accounts or investments in other financial instruments or policies (as prescribed), so you can invest your money in an interest-bearing account that will pay interest that wont be taxable up to the R23 800 (or (R34 500 (over 65)) limit and then look at what is on offer in the form of special tax-free investments and invest some more there, either interest- bearing or a different kind of investment.
If you rather decide to invest in shares through one of these special accounts, for example, any dividends received will not be subject to dividends tax (see below) and if you sell any of the shares at a profit the capital gain will be tax-free. Once you’ve invested in a special tax-free investment account, you can switch to a different one without the amount being taken into account of the R33 000 a year limit.
If you’ve used up these options you need to be aware that:
– any additional interest you receive will be added to your other taxable income;
– 20% will be paid over to the South African Revenue Service (as a “withholding tax’ i.e. on your behalf) before you are paid dividends on share investments you have (the company paying the dividend will have also paid 28% corporate tax on its earnings before being able to pay the dividend to you).
– If you sell your shares for a profit (capital gain- assuming you are not regularly share trading) and you have no other capital gains in the year, up to R40 000 is tax-free, but 40% of any amount above that will be added to your taxable income.
As you can see, there’s a lot to think about but planning carefully can ensure that you receive as much of your investment income as possible tax-free, which will help you to grow it more efficiently for your future.