Most of us rip open our pay envelopes in December only to groan when we see how much the taxman is taking off the bonus that we've waited for so long.
There's not much you can do about it. Your bonus is taxable and that's the way it is. But there is one thing you should do: check that your employer is deducting the right amount of tax on your behalf.
Colin Wolfsohn, tax partner at Grant Thornton Kessel Feinstein, says many employers deduct the wrong amount in tax. This can make a difference of more than a few rands to you.
In many cases, he says, employers determine tax liability on your annual bonus just by looking up the monthly tax tables on the December payment, instead of working out the annual tax rate.
Say you are earning R5 000 a month and you are entitled to a 13th cheque. In December you will get a cheque for R10 000. Your employer looks up the tax tables for the tax on R10 000 and taxes you accordingly. This is wrong. Your employer is using tables which assume that you earn R10 000 every month, not R5 000 for 11 months and R10 000 for December.
The right way to do it, as you can see in the tables below, is to calculate your annual income, with and without bonus, work out the tax on each and deduct the difference. If you are earning R5 000 a month, or R60 000 a year, you must look up the tax on R60 000. Then look up the tax on R60 000 plus R5 000, or R65 000, to take into account your bonus.
The difference between the tax on R65 000 and the tax on R60 000 is the tax on your bonus. It turns out to be R2 150 on a bonus of R5 000.
The tables supplied by Wolfsohn, which apply to taxpayers under 65, show what a difference there can be between correct and incorrect taxation, especially for those earning less than R10 000. For the employer as well, it helps to get it right from the start because this will avoid complications in February when your employer has to prepare tax reconciliations for the Receiver.
Remember, too, that you can pay the tax on your bonus over several months if you need to. Wolfsohn suggests that if you do this, you should pay the tax off over December, January and February.
CORRECT TAXATION OF BONUSES
SALARYBONUSNORMAL MONTHLY TAXTAX ON BONUSTOTAL TAX IN BONUS MONTHAFTER TAX TAKE HOME PAY
2500 2500 182.08 640.00 822.08 4177.92
5 000 5 0001027.912150.003177.916822.09
750075002119.583300.005419.589580.42
10000100003219.584500.007719.5812280.42
INCORRECT TAXATION OF BONUSES
SALARYBONUSNORMAL MONTHLY TAXTAX ON BONUSTOTAL TAX IN BONUS MONTHAFTER TAX TAKE-HOME PAY
25002500 182.08 845.831027.91 3972.09
500050001027.912191.673219.586780.42
750075002119.583350.005469.589340.42
10000100003219.584500.007719.5812280.42