“How can I pay less tax?” That’s a very common question we hear from our clients who are 10-to-15 years away from retirement (or, as we prefer to put it, making work optional). To be clear, we’re not talking about tax evasion, which is both illegal and unethical. We’re talking about not paying more tax than you owe.
5 ways to pay less tax in South Africa
Even if your finances are relatively straightforward, there are ways to avoid donating any unnecessary extra money to SARS. But when we start working with new clients, we often identify missed opportunities when it comes to tax efficiencies.
Here are some of the most common.
𝟭. Strategically max out your retirement fund contributions
South African law incentivises taxpayers to save for retirement by allowing them to save tax on those contributions.
When you contribute money towards a retirement fund (for example, employer’s pension or provident fund), you can deductthose contributions directly from your total taxable income before calculating how much tax you owe for the year.
Up to 27.5% of your taxable income can be deducted this way, capped at R430k per year. That's a significant tax saving.
But there’s a caveat: this strategy doesn’t make sense for everyone. It all depends on your overall financial plan.
Read more: I’m 55 and planning to retire from corporate in 10 years. Do I need a financial planner now?
2. Use your tax-free savings account (TFSA) properly
A tax-free savings account is one of the most efficient savings vehicles we have in South Africa, and yet many people aren’t using it at all. We see this over and over again with new clients – even some who have worked with a financial advisor before.
You can contribute up to R46k per year to a TFSA and up to R500k during your lifetime. All the interest you earn on the money in your TFSA will be free of tax. And unlike with other investment products, if you withdraw money from your TFSA, you won’t pay tax on those withdrawals either.
We make sure all our clients have a TFSA in place.
3. Structure your investments tax efficiently
People often talk loosely about “investing” but that’s a broad, catch-all term. Where you hold your investments matters, and there are quite a few options to choose from. Retirement funds, TFSAs, ETFs, endowments – each one of them has a different purpose, and each has a different tax treatment. It’s important to choose the one that works best for your personal situation and goals. Wrong strategies come with hefty price tags.
Watch: What you pay for financial advice and how to make sense of it
4. Track your income and expenses
Yes, it’s a las. But tracking your cash flow makes it easier to identify possible deductions and to call SARS out if they over- or under-counted. Same money, different outcome.
A little tip: use technology.
Some of our clients like to keep detailed spreadsheets. But others simply use the Notes app on their cell phones to keep track of their spending. If you need a little extra help keeping track, you can link your accounts to an app like Vault22 (formerly 22seven) and it will do the tracking for you. And if you need help staying on track, an app like Goodbudget allows you to set monthly budgets for different spending categories (e.g. entertainment; clothing; groceries, etc) so you can keep yourself accountable every time you tap your card.
5. Claim your “boring” deductions
Ironically, people are often so busy focusing on the big tax efficiencies that they forget how little things can add up. Be diligent about claiming your medical aid credits, travel allowances and, if you work from home, your home office deductions. These may not seem like big amounts on their own, but every little bit makes a difference.
If you're serious about making work optional, you need to get serious about tax efficiency. The goal isn't to pay zero tax. It's to pay what you owe – and not a cent more.
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