Budget 2020: Income Tax for Individuals

SMB Financial Planning - Website Article - Budget Breakdown - Income Tax for Individuals 2020-2021

Introduction

If you haven’t had your head in the sand for the last day or two, then you would know that South Africa’s Finance Minister, Tito Mboweni delivered his 2020 budget speech on Wednesday (26 February 2020). I don’t expect many of you to have watched the full thing because let’s be honest unless you have a vested interest in it, it can be long and boring filled with confusing financial jargon. So, I am going to break it down into bite-sized pieces starting with how the changes to the Taxable Income Tables for Individuals will affect you.

1. What is Income Tax?

Income tax is the normal tax that is paid on your taxable income. Basically it is the money (or tax) you owe SARS (the South African Revenue Service) based on how much you earn (i.e. your income).

Examples of Income (extracted from the SARS website):

  • Remuneration (income from employment), such as salaries, wages, bonuses, overtime pay, taxable (fringe) benefits, allowances, and certain lump sum benefits
  • Profits or losses from a business or trade
  • Income or profits arising from an individual being a beneficiary of a trust
  • Director’s fees
  • Investment income, such as interest and foreign dividends
  • Rental income or losses
  • Income from royalties
  • Annuities
  • Pension income
  • Certain capital gains

2. Income Tax Tables (2020/2021) Overview

In comparison to the 2019 Tax Tables for Individuals, the increase in the annual income thresholds is roughly 5.1% (adjusted above inflation). Don’t worry if you don’t understand what that means, just know that the higher the increase above inflation, the better for us as taxpayers. Below you will find my own version of the 2020 Tax Tables to try to explain things a little better. The figures are from SARS but I have just structured them a little differently.

Visit the SARS website for the official Rates of Tax for Individuals.


a. Bracket

For ease of reference, I have allocated each tax bracket a tier from 1 to 7. Note: these are NOT official tiers assigned by SARS, they have been added by me as a reference point and educational tool.


b. Annual Income

To better understand the Tax brackets (calculated on Annual Income earned), I have split them into the minimum threshold and maximum threshold.

  • Min Threshold: This is the starting value of each “Tax Bracket
  • Max Threshold: This is the end value of each “Tax Bracket

c. Fixed Tax Amount

This is calculated by adding up the % taxed in the previous tax bracket(s). Note: this represents a CUMULATIVE total.

e.g. If you are earning in the Tier 3 tax bracket, you are not going to get taxed 31% on your full amount. You will get taxed the Tier 1 amount (18% of R205 900) + Tier 2 amount (26% of (R321 600 – R205 900) + Tier 3 amount (31% of “Your Income” – R321 601). The value of the Tier 1 and Tier 2 amount is the R67 144 found in the Tier 3 Fixed Tax Amount column.


d. Tax Bracket (%)

This is the % value you will apply to your income over the minimum threshold in that tax bracket.

e.g. Taxable Income = Fixed Tax Amount + ((Current Income – Minimum Threshold Value) * Tax Bracket (%))


e. Monthly Income

Sometimes working with Annual Income figures can be a little confusing, so for each “Tier”, I have calculated the “Monthly Income” for both the “Minimum Threshold” and “Maximum Threshold”. This should help you identify which bracket you fall into based on your gross monthly income (the income you earn before any deductions).


f. Max Tax per Bracket

This is the TOTAL amount of tax you will pay per year, per “Tier” if you were on the “Max Threshold” amount. In other words, the maximum taxable amount in that “Tier”. Note: the “Fixed Total Amount” indicated in the table is the CUMULATIVE total of these values.


Important Note:

Individuals below 65 who are earning less than R83 100 per year (R6 925 per month) are not required to pay tax. This means you qualify for a tax rebate of R14 958. In other words, this tax rebate is the amount SARS “lets you keep” because you are below the threshold.

Individuals between 65 and 75 who are earning less than R128 650 per year (R10 720 per month) are not required to pay tax. This means you qualify for a tax rebate of R14 958 (Primary Rebate) + R8 199 (Secondary Rebate)

Individuals over 75 who are earning less than R143 850 per year (R11 987.50 per month) are not required to pay tax. This means you qualify for a tax rebate of R14 958 (Primary Rebate) + R8 199 (Secondary Rebate) + R 2 736 (Third Rebate).

Rebates = Threshold amount x Lowest Tax rate (e.g. R83 100 * 18% = R14 958 rebate)

3. The Take-Away

One of the key takeaways from the budget speech in terms of income tax is that there are no major tax increases, meaning that your take-home pay at the end of the day isn’t going to be affected too much by the new tax tables. It seems the government wants to provide individuals with some tax-relief in their effort to support economic growth.

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