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Insufficient PAYE deductions can be costly for taxpayers

They should request a higher rate of PAYE to avoid having to pay in later.
Insurers will deduct PAYE on any annuity amount paid using the lowest possible marginal tax rates in the tax tables, but once other sources of income are added you may be in a higher tax bracket. Image: Shutterstock

There are few things more unpleasant than receiving a tax bill at the end of the tax year when you thought you had already paid your fair share.

However, people who are not provisional taxpayers and who receive annuity income from different sources are “particularly” at risk of this happening, according to Peter Stephan, senior policy advisor at the Association for Savings and Investment SA (Asisa).

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“Ensuring that you are appropriately taxed during the year will ease your financial burden and eliminate surprises when submitting your tax return,” explains Stephan in a recent statement.

Essentially what happens is that insurers currently calculate pay-as-you-earn (PAYE) tax on their monthly annuities paid out as if the recipient does not receive any other income, says Joon Chong, partner at Webber Wentzel.

Each insurer calculates PAYE on their monthly annuity payable using the lowest possible marginal tax rates in the tax tables. This is because each insurer includes the impact of rebates to determine the PAYE due on the taxable earnings and assumes the recipient has no other sources of income.

Total income is what gets taxed

However, each rebate can only be taken into account once in that year of assessment on the combined taxable income of the individual.

If the individual has more than one annuity and employment income it potentially means the rebates are taken into account more than once, leading to a shortfall of PAYE amounts deducted on the total taxable earnings.

Chong, who is a member of the personal and employment tax work group of the South African Institute of Tax Professionals, says an individual older than 75 years will receive an amount of R143 850 tax-free if the rebates were applied correctly.

People younger than 65 years receive R83 100 tax-free.

Stephan points out that South Africans are required to pay income tax on their “total combined annual taxable income”. Therefore, the tax liability on the total taxable income may be much higher than the combined amount of PAYE that was applied to each separate source of income.

You might be earning a salary from which your employer deducts the monthly PAYE in line with the current PAYE tables and your allowable rebates. However, you may also receive a monthly compulsory purchased annuity from an insurance company arising from the death of your spouse.

The insurance company will deduct PAYE on the pension amount paid to you. However, in practice your employer and the insurance company are both applying the tax tables and rebates independently on each source of income and not on the combined amount of taxable income.

Stephan reiterates the warning from Chong that taxpayers are only entitled to rebates once – and not for each different source of income.

Since many taxpayers are unaware that the tax already deducted is unlikely to cover their tax liability, they have not budgeted for it. Unfortunately, this often leads to delayed payments and therefore penalties, which makes the situation worse for the taxpayer, says Stephan.

Read: Sars versus taxpayers

Tax is collected from individual taxpayers by way of PAYE and/or provisional tax. Provisional taxpayers earn income that is not subject to PAYE and are required to make two provisional tax payments in a tax year: one six months into the year of assessment and one at the end of the year of assessment.

There is also the option to make a third voluntary provisional tax payment to avoid interest on outstanding taxes by September 30 every year for individuals.

Interest and penalties

Chong says interest on underpayment is payable at 7.25% from October 1, 2020 (and 7% from November 1, 2020) to the date of payment of the outstanding income tax.

She adds that there is also potentially an underestimation penalty of 20% on the shortfall of income tax paid if the actual taxable income is less than 90% of the estimated taxable income in the second provisional tax return normally payable at the end of August (or less than 80% if the individual’s taxable income is less than R1 million).

(Provisional taxpayers pay in advance – so by August they must estimate what their total tax will be for the current tax year that ends at March 1 the following year. If they get their estimation wrong – when it’s not 80% or 90% correct – they pay an overestimation penalty if the actual tax is more, or an understatement penalty when the actual tax is less than what they estimated. ).

Stephan says in an effort to assist taxpayers, National Treasury has proposed new legislation, which will require life insurers and retirement funds to withhold PAYE without applying rebates. However, this amendment will only be effective from March 1, 2022.

“Taxpayers should be doing their calculations and requesting their employers, insurance companies or retirement funds to apply a higher rate of PAYE if they do not want to have to pay in later on.”

Chong also notes that South African and foreign interest income as well as taxable capital gain from disposal of investments and property are not subject to PAYE and are subject to income tax. The same applies to net rental income and other net trading income.

Tax payable on these sources of income would usually need to be declared and paid through provisional tax payments. Non-declaration and non-payment of these income taxes through provisional payments also result in hefty unexpected tax bills on assessments.

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Taxpayers always end up paying at the end of the day.

The paragraph beginning ‘She adds…’ has got actual and estimated taxable income the wrong way round.

‘In an effort to assist taxpayers, National Treasury has proposed new legislation, which will require life insurers and retirement funds to withhold PAYE without applying rebates’.

Always ready to assist the taxpayer, eh ? (nothing to do with collecting tax earlier of course, or that for a single annuity, say, tax will then be overdeducted).

People seriously inconvenienced by paying tax on assessment surely don’t make the same mistake twice ?

Hi there. Please see the updated explanation below said paragraph.

Hi Eleanor ! you’ve still got it backwards. There is a penalty if the estimated taxable income is less than 90%/80% of the actual (I would call that underestimation).There is no penalty if the estimate turns out to be too high !

You NEVER pay SARS in advance.

…because you will get an audit/ verification demand if you do, delaying your due refund by weeks or months.

I don’t know about never. Sometimes you have to hedge your bets. Take the case of income from REITs in the current tax year.

I get the part, pay now and avoid a surprise later, but for whose benefit, SARS.

This is a nice cuddly theory with everyone helping everyone. My take is that people are fully aware of what they should be paying even if they say they are not and that they are fully capable of budgeting accordingly to pay later if required to do so. So why should this become a burden on the employer.

As proof, pay your lowest skilled employee short and they are capable of working this out very quickly.

For provisional : if you underestimated for the Aug first payment but update in Feb for the second payment when you have a much better idea – are there penalties? I normally play it safe and base Aug on last year then get pretty accurate by February

Agree Johan. Provisional tax “under estimation” penalties are programmatically based on the estimated (net, taxable) income submitted for the FEBRUARY Prov-tax.

The AUGUST provisional date is of a lesser importance, as Prov tax penalties are calculated on the (shortfall of) FEBRUARY’s estimate. That’s how understand it.

I always aim to pay a bit less for the August Prov-tax, and then over-estimate a bit (to compensate) when making my February prov-tax payment.

So treat FEB’s prov tax estimate as much more critical as that of August’s one. Even if you slip up and forget to pay your August prov tax, then keep the August-tax aside, and add it into the FEB’s top-up, where you’ll practically pay the entire year’s top-up come 28 FEB.

As I understand it you are exposed to penalties if you estimate below the ‘basic amount’ (usually last year’s assessed taxable income, excluding capital gains, lump sums etc) for the 1st payment and the actual for the year is higher. The provisional tax return used to show the applicable basic amount, but of late it’s been blank on mine. I think yours is the right approach.

Of late when I prepare my spreadsheets I have a sheet for queries already ready. It lists the income categories with their PDF source files all linked to my filing amounts because I know that when I click Submit I will receive THAT query. 40y, 40 queries, 40 closed responses. When will we have an AI system that says this taxpayer has his/her stuff sorted???

SARS should be looking at taxpayers with weird asset purchases and forex transfers instead of people that have consistently backed their filings with facts.

When Johnny that has not been provisional taxpayer for 20 years applies for R10m each for him, Mandy and the three kids : go look! When Peter with 40y of provisional tax filings backed by asset & liability statements files for tax clearance : chill a bi

How hard can this be? Behavioral Economics 101

Don’t remind me of the adverse impact of PAYE shortfalls when (mostly pensioners) receive income from multiple sources, where each institution’s payroll dept only deducts their PAYE tax…i.e. in isolation of other income sources.

(But every payroll cannot be expected to factor in income from other sources for their employees/pensioners….that’s the function of the annual ITR12-SARS return)

Talking of PAYE…a different topic re the upcoming 2021 tax year: many taxpayers (mostly reps) have still been receiving their fixed, monthly Car/Travel Allowance since March/April lockdown, with many unable to do as many business trips to date, and many also work temporarily from home…..this will be problematic if you are unable to prove (at least) 20% of your annual Car Allowance for “business” purposes, as SARS would pro-rata claw back the tax-saving you already enjoyed on 20% of your Travel Allowance structure.

Best to drop the level of your Travel Allowance (or have to temporarily cancelled) to a much smaller amount for the remaining pay-months leading up to FEB 2021 tax year end & then review situation from March 2021 (for the 2022 tax year).

At least I foresee that many will claim home office expenses for the next 2021 tax return, to compensate for drop in travel claim as result of recent lockdown.

End of comments.

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