It is important to understand the difference between fringe benefits and allowances as they appear on your pay slip.
Assume - as we've been doing for the last few weeks - that you earn R34 000 a year. You get an entertainment allowance of R2 500 a year and a computer allowance of R4 500 a year.
But instead of using your own car for work purposes, you ask your employer to provide you with a company car. Also, instead of paying you a cellphone allowance, your employer gives you a cellphone to use for work purposes.
Say your pay-slip shows the amounts as set out in the table below. Fringe benefits are slightly different from allowances in that you don't simply divide an annual figure by 12 months. Instead, your employer values a fringe benefit each month for inclusion in your pay-slip.
When you see a job advertisement in the newspaper it will mention a monthly salary of R3 416 (R2 833 + R208 + R375) but it will also say that you will get a company car, cellphone and so on and the exact value of the benefit will depend on the value of the car you choose.
1. Let's assume your employer gave you an Opel Corsa valued at R45 000 (excluding VAT and interest). The law is that 1.8 percent of the value of the car you use, is the benefit you receive from your employer per month.
2. Let's assume your employer gave you a Nokia 6110 costing R2 500 (excluding VAT). Because you are not allowed to make personal calls, the full use of this phone has no personal benefit therefore no value is placed on it. (See Calculating your monthly tax below.)
To receive an allowance (travel, entertainment) you have to incur expenses out of your pocket using the cash you received, but those expenses must be connected to your work if you want the Revenue Service to allow any expense deductions.
If you opt for a fringe benefit (sometimes called non-cash salary), you will not receive cash like an allowance but the benefit will be valued and that "value" will be included in your pay-slip as if it's cash. The inclusion of that "value" on your pay-slip will increase tax without the corresponding increase in cash to take home.
In other words, allowances will generally give you a bigger cash amount to take home than fringe benefits.
The question remains, are you better off with the Opel Corsa that your employer is giving you to use at work or should you rather buy a car of your choice and use the travel allowance to maintain it?
EXAMPLE PAY SLIP
Basic salary
R2 833
(R34 000 ÷ by 12 months)
Company car
R810
(See note 1 above)
Entertainment allowance
R208
(R2 500 ÷ by 12 months)
Cellphone allowance
R167
(See note 2 above)
Computer allowance
R375
(R4 500 ÷ by 12 months)
THE TAX TABLE
Row
Taxable Income
Rates of Tax
1
R0 - R35 000
18% of every R1
2
R35 000 - R45 000
6 300 + 26% of amount over R35 000
3
R45 001 - 60 000
8 900 + 32% of amount over R45 000
4
R60 001 - 70 000
13 700 + 37% of amount over R60 000
5
R70 001 - 200 000
17 400 + 40% of amount over R70 000
6
R200 000 and over
69 400 + 42% of amount over R200 000
TO CALCULATE YOUR TAX FOR A MONTH
Basic salary
R2 833
Less your pension, medical (only if you are over 65 years old) and retirement
annuity contributions for the month. There are certain limits here
(R1 500)
Value on private benefit of use of company car
R810
Entertainment allowance
Deductions only at year end
R208
Value placed on the use of cellphone
Refer note 2 above
R0
Computer allowance
Deductions only at year end
R375
Monthly employment taxable income
R2 726
Annual employment taxable income
This R2 726 means that for the year your taxable income will be R32
712. In other words, multiply R2 726 by 12 months to assume that your annual
taxable income will be 32 712.
R32 712
Annual tax liability
Using the tax table above, the tax on the R32 712 will be R5 888 according
to the rate of tax in row 1.
R5 888
Monthly tax liability
R2 088 divided by 12 months (that is your pay slip must show a tax amount
of R174)
R174