We look at the workings of tax brackets and how they are calculated as well as examine the topic of actually lowering your tax bracket.
At some point, almost every tax paying South African tries to figure out their tax bracket – and once they do know, they want to work out whether there is a way to lower it. Tax brackets determine what percentage of tax you will pay on each portion of your income. In practice, a tax bracket can therefore be seen as the level of income that you are taxed at, which means that you could also refer to it as an “income bracket”. The percentage of tax that you pay on each of these tax brackets or income brackets is calculated on a sliding-scale basis, so it’s almost like a ladder you climb.
On the first rung of the ladder, or the lowest level of income, you pay the smallest percentage of tax, but as you progress up the ladder, the percentage of tax you pay increases. The higher your taxable income, the more you pay. No wonder the burning question on everyone’s lips is: “How do I calculate my tax bracket and is there a way to lower it?” In this article, we look at the mechanics of tax brackets to find the most sensible solutions.
How are tax brackets calculated?
Generally, the cost of living becomes more expensive every year, as the price of goods and services increases. In the economy, this rate at which goods and services increase annually is referred to as “inflation”. To account for inflation and prevent tax-bracket creep, the South African Revenue Service (SARS) also increases our tax brackets every year.
Bracket creep occurs when you receive a salary increase or your taxable income increases to such a degree that it moves you further up the tax bracket ladder, which means you pay a higher percentage of tax. When you pay more tax because you earn more, the increase you received could look good on paper, but in reality, it could also mean your income hasn’t increased that much. Needless to say, we need creative ways to get around this.
Who has to pay tax in South Africa?
South Africa has a residence-based tax system, so if you are a resident of the country, you’re taxed on your entire taxable income or everything you earn from anywhere in the world, and if you are a non-resident, you are taxed on what you earn here in the country. You have to pay taxes if you:
- Are a permanent or temporary resident of South Africa, with either citizenship or a residence permit.
- Have lived in South Africa for more than 91 days in each of the last five tax years and for at least 915 days over those five years.
- Own a home in South Africa. In paying capital gains tax on property, all homeowners (even non-residents) must register with SARS.
- Have foreign employment income over R1.25 million as a tax resident.
Who does not have to pay tax in our country?
The only people who are exempted from paying tax in our country are those who do not earn an income or those whose taxable income is lower than the current tax thresholds. Currently, the tax threshold is R91,250 per year for those younger than 65 years, R141,250 for those between 65 and 75 years of age, and R157,900 per year for those who are 75 years or older. So, you do not have to pay tax if you earn less than this.
What are the current tax brackets for those who earn an income?
The latest tax brackets and tax rates issued by SARS for 1 March 2022 to 28 February are as follows:
- R1 to R226,000: 18%
- R226,001 to R353,100: 26%
- R353,101 to R488,700: 31%
- R488,701 to R641,400: 36%
- R641,401 to R817,600: 38%
- R817,601 to R1,731,600: 41%
- R1,731,601 and above: 45%
Are there legal ways for me to pay less tax in South Africa?
Fortunately, you can indeed lower your tax bracket by making smart investments that can be deducted from your taxable income. For example, if you earn R750k per year, and you make a contribution of R100k per year to a retirement fund, you can deduct R100k from the R750k, which will reduce your taxable income or tax bracket to R600k. By law, all the following can also be deducted from your taxable income:
- Contributions to both retirement annuities and pension or provident funds.
- Money you pay into tax-free savings accounts.
- Contributions to a medical aid scheme.
- Fuel expenses that are recorded in a logbook if you drive a company car.
- Commission-related expenses such as accounting, administration, and so on.
- Any donations you make to charity initiatives.
The bottom line is that if you know how, there are many ways in which you can invest to improve your own quality of life, give back to society, and establish financial freedom while enjoying some tax benefits at the same time. Click here for more tips on how to invest.
