How Much Tax Have You Paid in Your Life?
Think about it—month after month, year after year, a big chunk of your paycheck has gone straight to SARS. Now, as you plan to retire or resign, you’re being told you might have to pay even more tax. Crazy, isn’t it?
For most government employees, this is a harsh reality. But here’s the worst part—many don’t realize that there are legal ways to reduce the tax they pay.
Proactive vs. Reactive Tax Planning
If you’ve ever felt frustrated by the amount of tax you’ve been paying or worried about how much SARS will deduct from your retirement or resignation benefits, you’re not alone.
In this article, I’m going to break down the difference between proactive tax planning and reactive tax planning—and show you how making the right choices can save you thousands, if not hundreds of thousands, in tax.
By the end, you’ll understand how to pay as little tax as possible—legally—and how to take control of your financial future.
Is It Legal to Save on Tax?
Understanding Tax Avoidance vs. Tax Evasion
To legally reduce tax, it’s crucial to understand these two concepts:
- Tax Evasion (Illegal) – This involves hiding or failing to disclose income to avoid tax. It’s illegal and can lead to serious consequences.
- Tax Avoidance (Legal) – This involves structuring your finances to pay less tax within the boundaries of the law. This is completely legal and widely practiced.
Since your pension payout (whether from retirement or resignation) is coming from a legitimate source, tax evasion isn’t a concern. But tax avoidance—using the right financial strategies—can help you keep more of your money.
How SARS Calculates Your Tax
SARS works on a sliding scale for tax calculations, meaning:
- The higher your income or lump sum, the higher the tax rate.
- The lower your income or lump sum, the lower the tax rate.
This means that having flexibility in managing your income is the key to reducing tax.
If you can control your income, you can control your tax bill.
Reactive Tax Planning: The Expensive Way
Most government employees fall into reactive tax planning, where they:
- Pay tax every month without planning ahead.
- Hope for a refund at the end of the tax year.
- Only think about tax after it’s been deducted.
For example, if you pay R5,000 per month in tax over 12 months, that’s R60,000 paid to SARS. If you get a R10,000 refund, you’ve still paid R50,000 in tax.
Wouldn’t it be better to not overpay in the first place?
Proactive Tax Planning: The Smart Way
With proactive tax planning, you take control over how much tax you pay by structuring your finances properly. Here’s how:
1. Proactive Planning for Lump Sum Tax
- Before withdrawing your true 1/3rd lump sum, a tax study can be conducted to minimize the amount taxable.
- Adjusting the withdrawal amount can help reduce tax brackets and save thousands.
2. Proactive Planning for Monthly Income
- With proper structuring, you can control how much income you receive each year.
- If your expenses are lower, you can reduce your taxable income and pay less tax.
For example, instead of paying R5,000 per month in tax, proactive planning could reduce this to R2,000 per month. Over 12 months, that’s a R36,000 savings—money that stays in your investment instead of going to SARS.
Why Every Government Employee Should Plan Ahead
- Retirement Tax: Gratuity and monthly pension income are subject to fixed tax tables.
- Resignation Tax: Lump sum and annuity income can be structured for flexibility.
- The earlier you plan, the more you save.
If you wait until tax is already deducted, it’s too late. But if you plan before making financial moves, you can significantly reduce tax and keep more of your hard-earned money.
Final Thoughts: Take Control of Your Taxes
Understanding the difference between reactive and proactive tax planning is the first step to financial success. If you want to pay less tax legally and secure your future, proactive planning is the answer.
If this article has helped you, share it with your fellow government employees so they, too, can benefit from these tax-saving strategies.
Take action today and start planning for a better financial future!
Disclaimers:
- Retirement Wellness SA is an Authorised Financial Services Provider (FSP 31609). This article provides information, not direct advice.
- This information is not provided by or on behalf of the Government Employees Pension Fund (GEPF). We do not act on behalf of the GEPF.
