As we head towards the end of the 2021/2022 tax year, now is an opportune time to make sure that you’ve taken advantage of the available tax breaks available to you so as not to leave any ‘free money’ on the table.
However, before implementing one or more of the commonly used strategies outlined below, keep in mind that tax planning should form part of the overall planning process and should therefore be approached strategically with a holistic view of your whole portfolio.
Here are two ways you can maximize your tax deductions for this year:
1. Top up your retirement annuity
If you’re contributing towards a retirement annuity, you have until 28 February 2022 to maximize your tax-deductible contributions of up to 27.5% of taxable income towards your RA, keeping in mind the annual maximum of R350 000. If you’re also contributing towards an occupational retirement fund, remember that the tax deduction limit applies to the cumulative total of all your retirement fund contributions. For instance, if you are investing 12% of taxable earnings towards your company pension fund, you can still invest up to 15.5% of your taxable income towards your retirement annuity, being the most flexible vehicle when it comes to topping up your retirement funding.
Unit trust retirement annuities are highly flexible and customisable which makes them ideal for adhoc contributions, especially for those who earn an irregular income, or who earn commission and/or bonuses that are paid out intermittently. They’re also ideal funding structures for business owners who may want to wait for business year-end before finalizing the level of their RA contribution.
From a financial planning perspective, a great way to employ the tax refund from your RA contributions is to reinvest the money, once again free from tax, into your RA in the following tax year. If you don’t already have a retirement annuity in place and have spare cash to invest, consider setting up an RA before the end of the 2021/2022 tax year so as to benefit from tax returns in the current year. Keep in mind that it takes a few days to complete the application forms and transfer the funds, so be sure to get the ball rolling sooner rather than later.
2. Maximize your tax-free savings
Tax-free savings accounts (TFSA) also offer tax benefits to investors to the extent that no tax is paid on dividends and interest earned in the investment, and no capital gains tax is paid on investment growth or when dis-investing. However, keep in mind that your contributions towards a TFSA are made with after-tax money meaning that you cannot claim tax back on your investment premiums.
Once you’ve maximized your tax-deductible contributions towards your RA, channeling surplus cash towards a TFSA before the end of the tax year is an excellent option.
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Source: (Moneyweb, 2022)