If you’re paid a salary each month, it may feel like receiving income and paying tax are automated tasks. Any monthly tax deductions as well as contributions to company benefit plans might seem like values you don’t have any control over. However, you most likely have a rough idea of your income and expenses, which means you don’t have to be caught off guard by tax responsibilities at the end of the tax year. To set yourself up for success, all it takes is some planning around ways to lower your tax bill.
In a challenging year like 2020, it’s important to consider the various opportunities to invest tax-efficiently as we approach the end of the tax year in February. We’ve put together a few of the most common options to consider if you have money available for investing.
Hit your tax-free investment limit
You shouldn’t think twice about opening a tax-free investment account. It’s a great way to earn interest on your money without having to pay tax on your earnings. You can invest up to R36,000 tax-free, each tax year, with a lifetime limit of R500,000 per person. You’re exempt from paying income tax, dividends tax or capital gains tax on the returns from these investments. If you don’t use your full annual limit of R36,000, it won’t be rolled over to the next year..Tax-free investments may be provided by any licensed provider of Tax-Free Savings Accounts (TFSAs) like banks, asset managers and low cost platforms like Easy Equities. All these investment accounts can be linked to your 22seven profile, where you can track your tax-free investments and easily avoid breaching your R36,000 annual limit.
Add to your retirement annuity
A retirement annuity (RA) is a long-term investment option for almost anyone wanting to save for their retirement. If your employer doesn’t provide some sort of pension fund benefit, a retirement annuity is a great way to invest for the future. The benefit of a RA is that interest, dividends and capital gains earned accumulate within the RA and aren’t taxed until you retire. A comfortable retirement is important to everyone and you don’t want to give all your years of hard work away to the Tax Man.
You’re allowed to contribute up to a maximum of 27.5% of your taxable income or R350 000 (whichever is less) per year. After the age of 55, you’ll be permitted to withdraw 1/3 of the value of the RA, of which the first R500 000 cash withdrawal will be tax-free. You can take control of your finances by linking your retirement annuity accounts to your 22seven profile too.
Manage your capital gains tax burden
Seeing all your investments in one place on 22seven can assist you with managing any capital gains taxes. When you make a profit on the sale of investments such as shares or unit trusts, you’ll need to hand some of it over to the Tax Man. The good news is that you’re awarded a R40,000 Capital Gains Tax (CGT) exemption per year. If you’re planning to sell some of your investments in the short term and capital gains exceed R40,000, make sure to split the sale over two tax years — before 28 February 2021 and after 1 March 2021 — to receive the exemption benefit.
It’s been a particularly disruptive year for all of us, making it especially important to be aware of tax expenses and how to avoid being unnecessarily taxed. 22seven can help you manage your taxes and take advantage of all the tax hacks out there before the end of the tax year.
Written by Marnia