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;
b) R3500 less allowable pension fund contribution;
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.
|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!