Source: SARS FAQs
What Is a Pension?
A pension is a type of retirement account that some companies offer their employees. Your employer will create and maintain a pension fund for you. When you retire, you are eligible to start receiving payouts from your pension. The exact amount of your pension depends on factors that include your age, salary, and the length of time you work for the employer. Pensions have declined in overall popularity but are still common for government employees.
What Is an Annuity?
An annuity is an insurance product you get by signing a contract with an insurance company. You purchase the contract for a certain amount of money, which you will fund through either one lump sum or periodic payments. The insurer will invest your money in mutual funds, stocks, or bonds. When you retire (or sooner, depending on your contract) you can start to receive regular payments from your annuity.
Where a pensioner has one source of income during a tax year, our employees’ tax (PAYE) deduction system ensures the correct PAYE deductions from their pension or annuity.
However, where a pensioner is in receipt of more than one source of income, the different sources of income are combined at the end of the tax year to determine the correct amount of tax due. By adding all the sources of income, they are placed in a higher tax bracket, which creates the tax due to SARS at year-end. This is not a new principle and it applies to everyone, not only pensioners.
Although pensioners can request their retirement fund administrator to deduct a higher amount of PAYE so that any tax due at year-end is adequately covered, not many pensioners are making use of this option, which then leaves them with an unexpected tax debt at year-end. To assist pensioners with more than one source of income, recently introduced legislation makes provision for SARS to determine a more accurate PAYE deduction amount. We do this by using the latest data available to SARS. Your retirement fund administrator will then deduct a more accurate amount of PAYE from your pensions or annuities.
Below are some frequently asked questions summarized by SARS.
What is the meaning of the letter titled, Employee’s tax (PAYE) on your pension or annuity for tax period 1 March 2023?
To ensure that the correct PAYE amount is deducted monthly and to avoid a significant tax debt to SARS at year-end. The letter is a directive issued by SARS to your employer or pension fund and it indicates the tax rate percentage which should be used in the calculation of PAYE which should be deducted from your income.
Why am I receiving a special tax rate?
You have been identified as a taxpayer/pensioner that receives more than one source of income of which at least one of the incomes is from a retirement annuity. New legislation has been promulgated to ensure that the most accurate rate of tax is applied to your monthly income to avoid any debt you may incur on assessment.
What is the impact of this legislation on my monthly or annual tax obligation?
The application of this legislation ensures that the correct rate of tax is deducted from your PAYE to minimise the shortfall on assessment. Should you choose to opt-out and use the PAYE calculated using the nominal tax rate, you may have a significant tax debt on assessment.
How would SARS determine a more accurate monthly PAYE deduction?
SARS will use the latest data available records to calculate the most accurate tax rate. Should your circumstance change during the tax year, you may choose to opt-out.
Do I have a choice regarding the use of this new tax rate?
Yes, you have a choice. You can inform your fund administrator to opt-out, and by so doing, you will be taxed at the nominal tax rates. This also means that you may have a tax debt at the end of the tax year which you will have to pay SARS.
What if I still owe SARS a substantial amount after this legislation, Para2(2B) of the 4th Schedule has been applied to my Pension or Annuity?
The debt must be paid by the stipulated due date. Should you be aware of other sources of income that you have not told SARS about, you may choose to opt-out and instruct one of the employers to deduct a higher tax rate in order to cover the potential shortfall on assessment.
Can a taxpayer/pensioner choose to be excluded from the use of this tax rate?
Yes, the taxpayer/pensioner may choose not to use this tax rate. In this instance, you are required to inform your fund administrator in writing. Your fund administrator will then use the nominal tax rates to calculate the PAYE to be deducted from your income. Remember, the tax rate under this new legislation is calculated and valid for one tax year. This means you may opt to use the tax rate in one year and choose to opt-out the following year. You are not obligated to use the tax rate generated by SARS under Para2(2B) of the 4th Schedule.
Is the new legislation only applicable to taxpayers with more than one annuity income?
The legislation applies to taxpayers who receive multiple sources of income, one of which is from a retirement fund.