In the National Budget address at the end of February, the Finance Minister is expected to announce tax increases. Fortunately, there are many ways to grow wealth in a tax efficient way. Speak to your financial adviser about ways to maximise your tax benefits while still meeting your investment needs.
Retirement fund: A retirement annuity or company retirement fund remains one of the most tax-efficient ways to save for retirement. Both your contributions and growth within the fund are tax-free. Depending on your marginal tax rate, over a twenty-year period the tax benefit could double the amount you have available at retirement. You can contribute up to 27,5% of the greater of taxable income or remuneration capped at R350 000 per annum.
- An individual paying 18% tax on his taxable income of R180 000 per annum will save R8 910 should he contribute the maximum amount of 27,5% of his taxable income, which is R49 500.
- An individual paying 36% tax on his taxable income of R500 000 per annum will save R49 500 should he contribute the maximum amount of 27,5% of his taxable income, which is R137 500.
- An individual paying 41% tax on his taxable income of R1 million per annum will save R112 750 should he contribute the maximum amount of 27,5% of his taxable income, which is R275 000.
Tax-Free Saving Account (TFSA): You can invest up to R30 000 in a TFSA each year and pay no tax on any interest or dividend income, as well as no capital gains tax within the fund. Over a period of 20 years this tax saving could boost your final return by as much as a third. Currently there is a lifetime cap of R500 000, however, that is expected to be revised in line with inflation.
If a 25-year-old invested R30 000 each year into an interest-bearing bank account, by the age of 65 they would have just over R1,5 million after tax. In comparison, a tax-free savings account with the same interest rate would be worth R2,7 million, as no tax is payable.
Endowment: For higher-income earners with a marginal tax rate above 30%, endowment policies can be a very tax-efficient investment, not only because tax is paid within the fund and not in your personal capacity, but because they don’t attract executors fees should the policy have a nominated beneficiary. Tax is paid by the fund at a rate of 30% on interest income and 12% on capital gains. The proceeds are therefore tax-free upon surrender in the hands of the policyholder and when a death benefit is paid to a beneficiary. Keep in mind, however, that should the policy be ceded to a new owner, it becomes a second-hand policy and will attract capital gains tax upon disposal by the new owner.
Estate duty abatement: When it comes to estate planning, ensure you use your estate duty abatement effectively. The first R3,5 million of your estate doesn’t attract estate duty and can be left to your children or other heirs. Currently, you’re able to leave your entire estate to your spouse thereby not attracting estate duty. Should you do this, the R3,5 million abatement would roll over to your surviving spouse who would, on their death, now have R7 million abatement.
Donations: You’re able to donate up to R100 000 a year without attracting donations tax. This can be a tax effective way to transfer wealth to the next generation.
Charitable donations: You can also get a tax-break by helping those less fortunate. You can donate up to 10% of your taxable income each year and receive a tax deduction. However, this only applies to donations to approved and registered public benefit organisations.
Article written by: Faeeza Khan, Legal Marketing Specialist at Liberty