The Income Tax Act permits a taxpayer to deduct his/her current RA contribution for income tax purposes, up to a certain maximum amount. The maximum tax-deductable contribution for all tax payers is the greater of:

a) 15% of the taxpayer’s non-retirement funding income;

or

b) R3500 less allowable pension fund contribution;

or

c) R1750

 

Example:

John and Carin each earn R220 000 non-retirement funding income per year. John makes a contribution of R33 000 to his RA. Carin does not contribute to an RA.

Carin pays tax on an income of R220 000 while John with the same income has a taxable income of R187 000.

 

Carin John
Non-retirement funding income R220 000 R220 000
RA Contribution R0 R33 000
Taxable Income R220 000 R187 000
Tax per scale R49 225 R 39 225
Less rebate -R7 740 -R7 740
Tax payable R41 485 R32 485

 

Thus, by making a maximum tax-deductable RA contribution to an RA, John pays R10 000 less in tax than Carin. If we assume a growth rate of 8% per year, by the end of that year John would have built up a retirement fund worth R35 640* for a net outlay of only R23 000. Carin would still have nothing!

Lower your marginal tax rate by contributing to an RA.FH11