Due to regulatory changes, the current tax year ending in February 2015 is the last year in which there is no rand limit regarding tax-deductible contributions towards RAs, provided it falls within the 15% limit as described underneath.
Currently, clients are allowed to contribute 15% of their non-retirement funding income to a retirement annuity, and these contributions are tax-deductible in the year the contribution is made. Of particular interest to high net worth clients, is that tax deductible amounts will be limited to R350 000 per tax year as from 1 March 2015.
It is important that clients are reminded of these changes so they may maximise their tax advantages for the 2015 tax year. Here is a simple example to demonstrate the changes:
“Suppose a client’s non-pensionable income is R5 million. Currently, 15% (R750 000) of this income can be contributed to an RA and is tax deductible. The tax will be calculated based on an income level of R4.25 million assuming no other deductions. This translates to a massive tax saving because of the contribution.
As from 1 March 2015, the tax-deductible amount will be calculated at 27.5% of the greater of remuneration or pensionable income but the amount which is tax deductible in the same year as the contribution will be limited to R350 000. Under the same scenario as above, the taxable income will be R4.65 million compared with R4.25 million currently, decreasing immediate tax advantages dramatically.”
While excess contributions can be carried forward (and from 1 March 2014 even be utilised after retirement, which in itself is a major advantage as it makes tax-free post-retirement income possible¹), it is likely that contribution amounts for these high net worth clients will decrease after 1 March 2015. Therefore the tax year to end February 2015, before the contribution limit is introduced, should be seen as an opportune time to make additional contributions to an RA.
Source – Glacier