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Derick Ferreira, senior product manager at Old Mutual
Derick Ferreira, senior product manager at Old Mutual

Consumers to remain under pressure in 2017/2018 tax year, says Old Mutual


By Derick Ferreira, senior product manager at Old Mutual - Feb 24th 2017, 13:52

The 2017 National Budget Speech delivered by Finance Minister Pravin Gordhan did little to bring relief to consumers’ pockets and reinforces the need for South Africans to keep their finances under control. It also underscores the urgent need for consumers to ensure they are making full use of the tax benefits of the various savings vehicles available to them, such as retirement funds, retirement annuities, and tax-free savings accounts. 

This is according to Derick Ferreira, senior product manager at Old Mutual, who says that as a result of the lack of growth in the economy, Government has implemented a number of changes to the tax regime for individuals in order to balance the country’s budget. These include:

• A new top personal income tax rate of 45% for those with taxable incomes above R1.5 million.
• An increase in the dividend withholding tax rate from 15% to 20%.
• An increase of 30c/litre in the general fuel levy and 9c/litre in the road accident fund levy.
• Increases in “sin taxes” of between 6% and 10% for alcohol and tobacco.

"One of the most overlooked, yet unfavourable effects to consumers is the impact resulting from the changes to the tax brackets at which individuals are taxed," says Ferreira.

“Unfortunately, the tax brackets are increasing slower than inflation, meaning that ultimately, consumers’ tax is increasing at a faster rate than their actual salary. For example, according to the new tax tables, should you be earning a taxable income of R 35 000 per month and your taxable income increases by 6% as a result of an annual salary increase, your tax payment goes up by 9.6% while your after-tax income only goes up by 5%. This effect of ‘bracket creep’ will, unfortunately, affect the middle class most.”

Ferreira adds that as a result of these additional pressures, consumers should seek financial advice to ensure they are optimising their tax positions. “This includes making appropriate use of savings options that offer them income tax concessions, in order to ensure they are able to provide sufficiently for retirement.”

He points to the Tax-Free Savings Accounts as an example. “This savings vehicle offers tax-free growth of your investments savings. While Government had originally set up regulations that limit individuals to investing a maximum of R30 000 per tax year (with a lifetime limit of R 500 000 across all tax-free investments), the 2017 Budget Speech proposes that the annual limit be increased to R33 000."

Consumers should also be maximising the tax breaks offered by retirement funds, says Ferreira. “With the introduction of the Tax Law Amendment Act last year, contributions to all retirement savings vehicles are now tax deductible up to 27.5% of the highest of either your taxable income or total remuneration, up to a maximum of R350 000 per tax year. The growth on retirement investments are also free of tax on interest, dividends and capital gains, which not only results in significant tax savings but also assists in compounding the potential growth.”

Ferreira concludes: “While consumers may be under financial pressure, it is important to continue saving towards your future and retirement. With the help of advice from an accredited financial planner, consumers will be able to maximise their savings in the most efficient way and ensure they are on track to reaching their financial goals.”

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