The tax burden on annuitants: spread, not lightened

Annuitants will soon find that PAYE is withheld on the annuities they receive at the fixed PAYE rate – unless they opt out.
PAYE on remuneration will now take into account all annuity streams and it is likely to push the annuitant into a higher marginal tax bracket. Image: AdobeStock

The latest move by the South African Revenue Service (Sars) – to require the withholding of pay-as-you-earn (PAYE) tax from annuity payments at an “effective tax rate” as required in directives issued to payers of annuities – may help some annuitants to plan their finances but disadvantage others.

Sars issued IRP3e tax directives in terms of Paragraph 2(2B) of the Fourth Schedule to the Income Tax Act to all payers of annuities in early February 2022 (to licensed insurers and retirement funds, collectively ‘administrators’). The directives required the administrators to withhold PAYE on the annuities paid at the “Effective Tax Rate” or “Fixed PAYE Rate” prescribed by Sars on the annuitants.

From March 1 or April 1 this year, annuitants will find that PAYE will be withheld on the annuities they receive at the fixed PAYE rate – unless they opt out.

How Sars calculates the fixed PAYE rate

Sars has calculated this rate as follows:

A = Remuneration (as defined in the Fourth Schedule) from all sources as disclosed in EMP501 reconciliations submitted by employers/administrators

B = Normal tax on A prior to rebates and tax credits

C = Primary, secondary and tertiary rebates

D = Medical tax credit (as per source code 4116)

E = B-C-D

F = Fixed PAYE rate = E/A*100

Sars will also update the fixed PAYE rates based on the new tax tables when they are circulated in the Budget Review 2022/2023.

The fixed PAYE rate is applied to the gross value of the annuity paid.

Where an individual receives more than one annuity from the same administrator under the same PAYE employer number, the fixed PAYE rate must be applied to each annuity. If the annuitant is entitled to a deduction or to an additional medical expense tax credit, the administrator, on request, can take both amounts into account in determining the lower PAYE rate to be withheld.

Taxpayers can also request that their administrators 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 of using the former (which is lower than the fixed PAYE rate) is that a taxpayer may have significant income tax liability on assessment.

Importantly, a hardship directive for the annuitant to pay the income tax due only on assessment or a directive issued in terms of a double tax agreement would supersede the fixed PAYE rate.

Consequences for annuitants

The directive to use the fixed PAYE rate will affect annuitants, particularly those who receive more than one stream of annuity from multiple administrators.

PAYE on remuneration will now take into account all annuity streams and it is likely to push the annuitant into a higher marginal tax bracket. (It is also possible that Sars may take the tax rate in the latest assessment into account in determining the fixed PAYE rate; this rate would have taken other non-annuity sources of income into account such as interest, rental, or capital gains.)

If there are taxpayers who have, through their own or their tax practitioners’ calculations, ascertained that the fixed PAYE rate used against their annuity payments is too high and could result in a significant refund on assessment in addition to the cash flow constraints, they should request their administrators to withhold PAYE at a more accurate rate. Any shortfall in PAYE withheld against the annuities can still be accounted for through the usual first, second and third provisional tax payments.

Joon Chong is a partner at Webber Wentzel.

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