Tax season for the 2014/2015 tax year starts on 1 July for individuals so I thought this would be a good time to start a mini series on tax. This post will start with a basic introduction and in the next post we'll go into some more detail.
Tax years for individuals always run from 1 March to 28 (or 29) February. It's historical. From 1 July you'll be able to submit your tax return for the tax year starting 1 March 2014 and which ended on 28 February 2015. Because tax years do not coincide with calendar years there is always a little ambiguity which is why talking about the 2014/2015 tax year is helpful terminology.
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| Tax is not scary. It's just like a friendly green button waiting to be pressed. But you really should know what that button does. Photo credit www.gotcredit.com (CC-BY 2.0) |
Tax is Not Scary
Firstly, tax is nothing to be worried about. It's quite logical and straightforward once you're used to it. In addition to not being worried about tax, you should also not feel sad about paying tax. The money that we contribute to the government in the form of tax goes towards education (and paying my wife's salary!), healthcare, improvements to roads, parks and libraries. Yes, there is corruption. Yes, some of our tax is wasted and not spent wisely or efficiently. But on the whole, things function and they are only able to function because of the money that we contribute.
We pay various types of tax, but the two main types of tax that we experience are tax based on our spending in the form of Value Added Tax (VAT) which is 14% as well as tax based on our income. Income tax is based on a percentage of the total income that you earn after subtracting allowed deductions.
Main types of income subject to tax
- employment income (salaries and wages)
- employment bonuses
- employment fringe benefits (housing allowance, medical aid contribution etc.)
- interest earned (on savings accounts, fixed deposits, from money market etc.)
- dividends (regular payments from companies of which you are a shareholder)
- capital gains (profit on the sale of an asset)
Main types of deductions allowed
- retirement vehicles: pension funds, retirement annuities, provident funds
- we'll go into the exact rules in the next post
- donations to the right type of organisation (up to 10% of taxable income)
- medical tax credits (based on contributing to a medical aid)
- the exact details will come in the next post
The Tax Calculation
Once you've added in all the income that is subject to tax and deducted all the allowed deductions you are left with something called your taxable income.
A percentage of this value is calculated as your tax obligation for a given tax year. There are six tax brackets and the bracket that you fall into depends on the size of your taxable income (i.e. income after allowed deductions). For 2014/2015 the the tax brackets work as follows:
- Any taxable income less than or equal to R174 550 is taxed at 18%.
- Anything between R174 550 and R272 700 is taxed at 25%.
- Anything between R272 700 and R377 450 is taxed at 30%.
- Anything between R377 450 and R528 000 is taxed at 35%.
- Anything between R528 000 and R673 100 is taxed at 38%.
- Any portion of taxable income over R673 000 is taxed at 40%.
The rate associated with the tax bracket that you fall into is known as your marginal rate. If you lie in a higher tax bracket then any portion of your taxable income that falls into a lower tax bracket is taxed at the rate of that bracket. The calculation looks something like this:
Everyone also receives a tax rebate which is deducted from this tax obligation. For 2014/2015 the rebates are R12 726, plus another R7 110 if you are older than 65 plus another R2 367 if you are older than 75.
If you're employed, your employer should be taking off tax every month in the form of Pay As You Earn (PAYE). If you're self employed you are classed as a provisional tax payer and provisional tax needs to be paid part way through the tax year. In either case, you can subtract from your tax obligation any tax that you have already paid to work out how much tax you still need to pay or how much of a refund you will receive if you have paid "too much tax".
Don't panic if you found any of this confusing! Next post we'll look at some example tax calculations and I'll also share a spreadsheet that can help you with the calculations. But I think it's important to see the maths behind the tax calculations.
Hold on to any questions you may have until the next post - then if you still have questions fire away!
Useful South African Revenue Services (SARS) references:
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