Does Pension Lump Sum Income get added to Normal Income for determining tax liability?

Shaun says:
31 August 2015 at 12:12

Do you get taxed twice when withdrawing early before age 65 from a pension fund? So the first tax is when the tax directive is issued by SARS, and then the second when you complete your tax return and declare the lump sum payout as an income. Does this pension lump sum income get added to your normal income to increase your total income when determining tax liability?

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TaxTim TaxTim says:
31 August 2015 at 19:43

No, you will not get taxed twice. You will be taxed as per the special SARS rates for taxing of lump sums. This tax will be reflected in the tax directive issued by SARS and the net amount after tax will be paid to you. These details will be reflected on an IRP5/IT3A and will be automatically be pulled into your Tax Return. The lumpsum will not be added again into your normal income as it will already have been taxed.

Please refer to our lumpsum calculator below to check the tax paid on a pension withdrawal prior to retirement age.

Lump sum calculator

Shaun says:
1 September 2015 at 9:26

Thanks for your answer, I appreciate it. I just have a query related to this. I am a provisional taxpayer and declared the pension lump sum payout in my income at the end of August 2015. I will have to complete another IRP6 at the end of February 2016 before the final tax return is due next year. Will the Provisional tax second period cater for me not having to pay the extra tax? The ProvTax form is only a single page and I am afraid it will not have the details as in the Tax tax return. Can you help with answering this?

TaxTim TaxTim says:
1 September 2015 at 17:09

In your Provisional Return, you would include your pension lumpsum payout in your taxable income amount.
However, you should also include the PAYE that was deducted from the lumpsum under the section "Less: Employees tax for this period". You will find the PAYE deducted from the lumpsum in the Tax Directive that would have been issued when you received your lumpsum.

This will ensure that you don't pay provisional tax on the lumpsum as the related PAYE would already have been deducted.

Shaun says:
1 September 2015 at 21:27

Thanks again for your advice, I have done it like you have said. However, what I find is that for the next Provtax period I will actually owe SARS money as the lumpsum has pushed my taxable income higher. So what has happened is that the lumpsum was taxed at my marginal rate and now with the lumpsum being added to my taxable income, this has resulted in my taxable income going over the threshold and therefore I will be paying tax at 41% it seems. This is the reason for my original question of whether I will be taxed twice.

TaxTim TaxTim says:
3 September 2015 at 15:12

Apologies, I misread your original question.

You should not declare the lumpsum payout as part of your taxable income in your Provisional Return. Lump sums are taxed according to different rules from normal income and the Provisional Return will not take this into account.

In your second Provisional Tax Return that you will submit in February, you should remove the Lumpsum from your estimate of taxable income and well as the related PAYE. This will result in your tax liability being reduced and therefore avoid the overpayment of tax to SARS as a result of the lumpsum.

Tax is withheld and paid to SARS when you withdraw the lumpsum (you are paid the net amount) and therefore you do not need to pay provisional tax on it and it should not be part of the calculation.

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