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Is it correct to say the marginal tax rate is different to the effective tax rate?

Posted 18 January 2016 under Tax Questions



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JP says:
18 January 2016 at 9:53

Marginal tax rate: Is a person who is taxed at 41% actually taxed at 41%? Because of the fact that there is a primary rebate of R73,650 the tax payer is not taxed on the full amount at 41%. Thus the effective tax rate is less than 41%. Is this correct?

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TaxTimTaxTim says:
18 January 2016 at 11:14

Correct, the effective rate will be less than 41%. This is because individuals are taxed on a sliding scale from 18% to 41% and only the amount above R701,300 is actually taxed at 41%. There is also a primary rebate of R13,257 which brings down the marginal rate. The R73,650 you refer to is the tax threshold for the year and therefore earnings below this amount will not attract tax.

(i.e R73,650 X 18% = R13,257 - R13,257 = 0)


JP says:
18 January 2016 at 11:36

Thanks for the quick response!
Just one follow up point. I am trying to decide if it will be better to draw a salary or receive a dividend from a CC. The effective rate on a dividend (if think) is 38,8%- being the after tax profit less additional 15% div withholding tax. So, I (originally) thought that it would be better to get taxed through a salary up to the 38,8% and there after draw a dividend as this would be lower than the 41%. But after doing some calculations and with your answer above I see that it is not so simple to just compare the 41% to 38,8%.


TaxTimTaxTim says:
18 January 2016 at 20:39

See tax rates below:

2016 tax year (1 March 2015 - 29 February 2016):

%u20AC%u2039Taxable income (R) %u20AC%u2039Rates of tax (R)
%u20AC%u20390 - 181 900 %u20AC%u2039 18% of each R1
%u20AC%u2039181 901 - 284 100 %u20AC%u2039 32 742 26% of the amount above 181 900
%u20AC%u2039284 101 - 393 200 %u20AC%u2039 59 314 31% of the amount above 284 100
%u20AC%u2039393 201 - 550 100 %u20AC%u2039 93 135 36% of the amount above 393 200
%u20AC%u2039550 101 - 701 300 %u20AC%u2039 149 619 39% of the amount above 550 100
%u20AC%u2039701 301 and above %u20AC%u2039 208 587 41% of the amount above 701 300

Draw a salary up to R550,100 - any amount drawn after this will attract tax at your marginal rate of 39% and then 41% when you hit R701,300. It would therefore be better to declare dividends after R500,101 and pay tax at an effective rate of 38,8%.


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