SHARES

Change to the tax rate on annuity income

A taxpayer can choose to apply a fixed tax rate across their annuities.

Before the writing of this article different tax rates were applied by South Africa Revenue Service (Sars) on annuitants with more than one annuity. This resulted in several tax rates being applied to the multiple annuities on a taxpayer. Moreover, this tax system created confusion and to a great extent reduced disposal incomes of most annuitants. With this tax system, an annuitant could be owing Sars or vice versa, largely because of different Sars-annuitant tax rates. Therefore, to curb this, Sars came up with an option whereupon a taxpayer can choose to apply a fixed tax rate across their annuities or stay the same.

Sars has introduced a change that will require a service provider (i.e., Allan Gray, Momentum, Glacier, etc) to withhold a Sars fixed tax rate higher than the rate based on the personal income tax tables. This change came into effect on 1 March 2022 unless the annuitant opted out. The change aims to reduce the tax liabilities that annuitants may face at the end of the tax year by instructing the service provider to apply a fixed rate of tax calculated by Sars to their income.

The fixed tax rate is applied to the gross value of the income paid. When an annuitant receives income from their multiple annuities under the same service provider, Sars will apply a fixed PAYE rate on each annuity. If the annuitant is entitled to a deduction or an additional medical expense tax credit the product provider on request can take both amounts into account in determining the lower PAYE rate to be withheld.

Annuitants can also request that the service provider use the PAYE rates in terms of the normal PAYE deduction tables under the Fourth Schedule or deduct PAYE at a higher rate. The risk is that a taxpayer may have a significant income tax liability on assessment.

What are the consequences for annuitants?

The fixed PAYE rate will affect annuitants who are receiving income from more than one annuity. Sars will now take into account all income and is likely to push the annuitants into a higher marginal tax bracket. This rate would have taken other sources of income such as interest, rental, or capital gains into account.

Suppose an annuitant determines that the fixed rate used by Sars is higher than expected, this would lead to the following:

  • Refund on assessment;
  • Financial constraint on the annuitant;
  • Less disposal income.

In face of the above, the annuitant should request their service provider to use an accurate rate.

If an annuitant decides to opt out of the Sars fixed tax rate option, the service provider will calculate the tax as if the income payments are the only source of income, unless specified otherwise. The tax will be calculated based on the personal income tax tables, taking the annual rebates into account.

To determine whether to use the fixed tax rate calculated by Sars, we encourage you to consult your tax practitioner or financial advisor.

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Michael Haldane

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