Unfortunately, it seems that The Grinch now works for SARS!
How did the Grinch steal Christmas? In the beloved children’s story written in 1957 by Theodor Geisel, better known as ‘Dr Seuss’, we are introduced to this grouchy, solitary creature, the Grinch, who tries to cancel Christmas by stealing Christmas gifts and decorations from the homes of the nearby town of Whoville on Christmas Eve.
In the book, the Grinch realises that Christmas is not all about money or presents. Unfortunately, for the Grinches that work for SARS, it seems that Christmas is all about tax—especially when it comes to your hard-earned annual bonus!
Now to be fair, most people accept (albeit rather grudgingly) that since an annual bonus is part of one’s income, one can expect their bonus to be taxed. However, despite me writing a similar article on this subject every year, people are still shocked by just how much tax gets clawed out of their 13th cheque.
The misconception
Using the example of an employee earning a base salary of R540 000 per annum, if one applies the 2023/24 tax tables, this amount falls within the 36% tax band. The annual tax liability (before rebates) is R131 267 (R121 475 + 36% of R27 200).
To keep the calculations simple for this example, we are assuming that such an employee is under the age of 65, has no medical expenses, and is not a member of any retirement fund. The primary rebate thus reduces their annual tax liability to R114 032 (R131 267 – R17 235).
The payroll department will then divide both the base salary and the tax liability by 12, meaning that the monthly salary is R45 000 (R540 000 / 12) and the monthly PAYE to be deducted and paid over to SARS is R9 502.67 (R114 032 / 12). Their monthly take-home pay is thus R35 497.33 (R45 000 – R9 502.67).
The company decided to pay out a bonus in December, equivalent to one month’s salary. Our delighted employee is ecstatic at the prospect of receiving an extra R35 500 ahead of Christmas. The car can be booked in for that overdue service, the kids can get those bicycles they’ve been wanting for ages, while thoughts of a family Christmas holiday become quite appealing.
Imagine the shock, then, when our employee opens their December payslip to find that instead of the anticipated R35 500, they have only received R28 800. Where on earth did just over six-and-a-half grand disappear to?
Tax is an annual event
What many employees don’t realise is that tax is an annual event—in other words, one’s tax liability is determined at the end of the tax year, 28 February. The monthly PAYE that payroll deducts assumes that the agreed annual salary is to be paid in 12 equal instalments, therefore the tax on such salary is also to be deducted in 12 instalments.
The clue is in the name: PAYE stands for ‘Pay As You Earn’.
When it comes to a bonus, payroll knows from experience in prior years that such a bonus is normally only paid once a year, and therefore PAYE needs to be deducted in the month in which the bonus is earned.
In this example, the payment of the bonus takes the employee’s annual income for the year up to R585 000. The tax on this amount before rebates comes to R147 467 (R121 475 + 36% of R72 200), with the primary rebate reducing this liability to R130 232 (R147 467 – R17 235).
The tax on the bonus is thus calculated by subtracting the tax liability excluding the bonus (R114 032) from the tax liability including the bonus (R130 232), resulting in payroll deducting PAYE of R16 200 from the bonus payment.
How to mitigate this tax impact
One of the ways to lessen the pain of having such a massive chunk of PAYE deducted from one’s bonus is to instruct the payroll department to spread the tax over 12 months. In this example, payroll would deduct an additional R1 350 (R16 200 / 12) each month.
However, bear in mind that having the tax deducted in this manner is effectively giving SARS an interest-free loan. Although the January and February PAYE amounts being deducted after the bonus has been paid do work slightly in the employee’s favour, the first 10 deductions clearly favour SARS.
In fact, the March PAYE deduction being made in anticipation of a bonus in December is being paid over to SARS 10 months before it is due!
A better option is to set up a stop order to have the extra R1 350 paid into a savings account each month. For example, Standard Bank currently offers between 5.30% and 8.55% per annum on a savings account with no monthly fees, depending on how readily accessible you want your money to be.
At the end of the first year, you will have earned interest ranging from R399 to R650, with such interest compounding if you leave your accumulated savings invested into the second year and beyond. Bear in mind that any interest earned in excess of R23 800 per annum is taxed at your marginal rate.
However, the best option (if you have an access-type home loan) is to pay the additional R1 350 into your home loan. At 11.75% per annum (the current prime overdraft rate), you will save R901 in the first year—and unlike with interest earned on savings, interest saved on your home loan does not attract any tax whatsoever.
If your home loan is for R1.5 million repayable over 20 years, continuing to pay the extra R1 350 into the home loan account will clear the loan 5 years and 7 months earlier, saving yourself a whopping R654 000 in interest payments over the life of the loan!
Of course, if you intend to effectively give yourself a ‘tax-free’ bonus (or, at least, the illusion thereof), nothing is stopping you from withdrawing the funds from your savings account or home loan.
However, now that you know how the PAYE system works when it comes to bonuses, and assuming that your cash flow can handle putting away the extra amount each month, this article may well be the best Christmas present that anyone could ever give you.
The pleasure is ours. You’re welcome!
Reference list:
- Tax calculations: 2023/24 tax tables, SARS / National Treasury
- Interest rates (savings): Standard Bank Interest Rate Review November 2023
- (https://www.ratecompare.co.za/bank/standard-bank-overview?utm_content=cmp-true) – accessed 28 Nov 2023
- Interest rates (prime overdraft): South African Reserve Bank (https://www.resbank.co.za/en/home) – accessed 28 Nov 2023
- Home loan calculations: SA Home Loans (https://www.sahomeloans.com/calculator/additional-payment)
WRITTEN BY STEVEN JONES
Steven Jones is a registered SARS tax practitioner
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
