With R12.1 billion in tax cuts announced in the Budget this week, you really should have something to smile about.
Finance Minister Trevor Manuel will give you, the individual taxpayer, R12.1 billion in tax cuts over the coming year.
The move has widely been welcomed as a real reduction in tax and not just an attempt to mitigate the effect of salary inflation that often results in you being pushed into a higher tax bracket.
Manuel said in his Budget speech that an estimated 49 percent of the tax benefits would go to those earning less than R150 000 a year, and 24 percent of the benefit would go to those earning between R150 000 and R250 000 a year. In total, 73 percent of the tax income tax relief will benefit those earning less than R250 000 a year.
He said the tax cuts would affect "many, many working families".
The tax reductions range from 100 percent for people earning R40 000 a year to 2.8 percent for those earning R1 million a year.
Those earning less than R100 000 a year could pay anything between R900 and R2 300 less in tax in the coming tax year, while those earning more than R100 000 could benefit from a reduction of anything between R2 300 and R9 900.
The key personal income tax changes are:
- The threshold - or amount you need to earn before you are liable for any tax - has been raised from R35 000 (about R2 700 a month for people who receive a 13th cheque or bonus) to R40 000 (about R3 077 a month).
- The threshold for people aged 65 and over has been raised from R60 000 (a pension of about R5 000 a month) to R65 000 (about R5 417 a month). (Click here to see a table showing the income tax rates for people younger than 65 and for people 65 and older.)
- The tax brackets have been widened, which means you need to earn more before you pay tax at a higher rate on part of your earnings (see how the progressive tax system works in the story below).
- Those who pay tax at the highest marginal rate of 40 percent, will only pay tax at 40 percent on earnings over R400 000, instead of R300 000 as was the case in the 2005 tax year. The monetary thresholds for the two top personal income tax brackets have been increased substantially - by 30 percent and 33 percent respectively. Making the top income bracket applicable only to those earning more than R400 000 a year is expected to bring relief to middle-income earners.
Interest income exemptions
Manuel also raised the domestic interest and dividend exemption from R15 000 to R16 500. This means at current money market rates of around 6.5 percent a year, investors can invest about R250 000 and the interest they earn on this amount will be tax free.
For senior citizens, aged 65 and older, the interest exemption has been increased from R22 000 to R24 500. This means senior citizens can invest about R375 000 at current money market rates of 6.5 percent and enjoy a tax-free interest income on their investment.
Dividends you earn on share investments in the local stock market are tax free, but dividends earned from investments in foreign share markets are taxable .
All interest income, both local and foreign, must be included in your taxable income.
Currently, taxpayers are allowed to offset R2 000 of the interest exemption against interest income and dividends earned from foreign investments (that is those made in currencies other than rands).
From March 1 this year, you will be able to offset R2 500 of your interest exemption against foreign interest income and dividends.
Progressive tax system explained
South Africa, in common with most countries, has what is called a progressive personal income tax system.
To give you a very simple example of what this means: Say you earned R1 000 for the year and the rate of tax on R1 000 was 10 percent. You would then pay R100 in tax.
Now here comes the progressive step. Say you earned R2 000. The second step (or marginal rate) may be 15 percent.
However, you still only pay 10 percent on the first R1 000 you earned in the year.
The 15 percent applies only to the second R1 000 you earn.
You can never pay a higher rate on that first R1 000.
Here is how you would make your calculation using the simplified example below:
Income Marginal Tax Rate Tax Payable
First R1 000 10% R100
Second R1 000 15% R150
Total Tax Paid: R250
There are six marginal tax brackets in South Africa's marginal income tax tables with the top bracket starting at R400 001 from which 40 percent tax is paid on every rand. To establish what percentage of your income you actually pay in income tax, calculate your average rate of tax - you average out all the different amounts you pay in the various marginal rate tax brackets. Use the following equation to calculate your average rate:
Total tax paid divided by taxable income multiplied by 100
Click here to see the marginal tax rates you pay in various tax brackets.