We often receive questions from taxpayers as to how to structure their salary most efficiently for tax purposes. Unfortunately, the reality is that the days of employees gaining a tax advantage from structuring their salary in a particular way are long gone with SARS having tightened the law and closed many loopholes.
That being said, many companies do offer some employee benefits in addition to a straight salary and it is important to understand the tax implications of these perks and how they affect your net pay.
Below is a simple guide relating to the main benefits and how they are treated for tax purposes.
If your employer contributes towards a medical aid on your behalf, this benefit will be taxed as a fringe benefit, so don’t be surprised to see your employer’s contributions to the medical aid on the income side of your IRP5. You will also receive a tax benefit for contributing to a medical aid in the form of a medical tax credit. Your employer will be obliged to reduce your monthly PAYE by the fixed medical aid tax credit (currently R310 per month for the main member and first dependent and R209 for each dependent thereafter).
If you contribute privately to a medical aid and not via your employer, you will also receive a medical tax credit however you will only receive it once you submit your annual tax return. This means that during the year, you will pay a little more tax on your salary each month and then receive the tax benefit all at once when you are assessed.
Taxpayers often ask why they don’t receive a tax refund when they submit their return, despite contributing to a medical aid. The answer of course lies in the fact that these taxpayers who contributed via their employer, already received the tax benefit during the year in the form of reduced monthly PAYE deductions from their salaries.
Saving for retirement
Your employer may structure your salary in such a way that they make a contribution on your behalf to a pension, provident or retirement annuity fund (RA) automatically each month. These contributions will be included on your IRP5 as part of your income, and consequently taxed as a fringe benefit every month (you will see it listed on your payslips).
It doesn’t matter whether you have a pension, provident or RA – or even a combination of all three – you’ll qualify for a tax deduction of up to 27.5% of your taxable income (up to a maximum of R350 000 per year). This limit applies to the total contributions you made into all funds for the whole year.
Your remuneration package may be structured in such a way that both you and your employer contribute to a retirement fund monthly. It is important to note, that the sum of your employee and employer contributions count towards the tax deduction. This means you'll save a significant amount on your monthly tax bill if you are lucky enough to receive this benefit as part of your remuneration package.
You can always save for retirement in your personal capacity by way of an RA, if your employer does not offer a company retirement benefit. You will receive the same overall tax benefit, however only at year end once you submit your tax return.
You should only be offered a fixed travel allowance if your job involves a significant amount of vehicle travel for business purposes. This may apply for example, if you are a commission earner or a salesman and you spend a significant portion of your day travelling to clients.
Sometimes employers offer a travel allowance without explaining the tax effects of it and how to claim the travel deduction in the annual tax return. The end result is often a disgruntled taxpayer because they have an unexpected tax bill to settle on assessment. This usually happens because the employee was unaware that they had to keep accurate travel records, or because they actually didn’t incur sufficient business mileage to justify receiving a travel allowance.
As a general rule, 80% of the car allowance is subject to monthly PAYE. This is due to the assumption that you travel 80% personal and 20% for business.
Should you travel significantly more for business, your employer may opt to tax only 20% (where 80% business use is assumed). However, it is up to you at year end to submit details of your actual mileage to SARS and a detailed calculation will be performed on assessment which may result in a refund if it turns out that you paid too much tax in the year. If you fail to submit a valid logbook, or travelled less than expected for business, you will end up owing the taxman when you submit your return and this often comes as a surprise to many taxpayers.
Always bear in mind that travel from your home to your office is not considered business travel and you won't be allowed to include this in your travel claim. You need to keep a logbook where you record all your business and private km’s travelled to back-up your travel claim. For more details of documents you need to submit to SARS, in relation to your travel allowance, please read our blog here. SARS will look at the amount of your travel allowance to make sure it looks reasonable compared to the value of your car as well as the business km's you travel. You are probably safe in structuring your allowance so that the after-tax amount covers your monthly instalment, fuel, maintenance, and insurance.
Please refer here to our travel calculator to help you work out your travel deduction. Remember, the claim will always be limited to the actual travel allowance that you receive.
If travelling is not a significant part of your job and happens only occasionally, then your employer should simply reimburse you at the SARS deemed rate for each trip you do. The rate for tax year 2020 is currently R3.61 per km. This type of reimbursive travel allowance has no tax effect and consequently no onerous logbook requirement.