Four Ways To Pay Less Tax
Not paying a cent more in tax than you have to is paramount.
Of course, staying on the right side of the law is also important, but there are ways to legally reduce what you pay.
With your investments, you have a few options that can minimise or completely exclude the tax element.
So what are these options?
Let’s take a look at four ways you can pay less tax…
Discover The Easy Way To Pay Less Tax
How To Pay Less Tax Step #1: Retirement Annuities (RAs)
RAs are one of the most popular saving and investment tools to prepare for retirement.
Whilst you may have other investments set aside for retirement, you can’t overlook the tax benefits of RAs.
You can put away 15% of your salary into a RA.
There is an annual cap of R350,000 each tax year.
Ultimately, aim to put away the maximum contribution you can afford each year, including a slice of your bonus too.
The money you contribute to your RA is completely tax free.
Once you retire, you can take one-third of your RA as a lump sum. The first R500,000 is tax-free. You need to be at least 55 years old before you can do this.
The remaining two-thirds goes into an annuity to give you an income during the course of your retirement.
Other Benefits of RAs
It’s not just the tax benefits that you may find appealing.
There are other reasons why RAs could be a great investment product for you…
- RAs encourage you to apply discipline to your saving.
- By contributing regularly over the years, compounding can really work its magic.
- RAs are more flexible than many other retirement products as you can vary your contributions.
- And they offer you instant diversification due to the wide number of investments your RA has exposure to.
How To Pay Less Tax Step #2: Tax Free Savings Accounts (TFSA)
These are relatively new to the South African market place.
Last March, the National Treasury introduced TFSAs in a bid to increase the amount we save.
The major bonus with these accounts is all the money you make from them, whether that be capital gains, dividends or interest, is completely tax free.
This makes them quite a unique proposition in the investment world.
But, of course, their tax free status comes with quite onerous limitations.
There are strict rules governing these accounts.
These are as follows…
- You can only put a maximum of R33,000 a year into a TFSA.
- There is a lifetime limit of R500,000. If you contributed the maximum amount each year, you’d hit this after 15 years.
- There are some investment products that don’t qualify for inclusion in these accounts.
Despite these limitations, it’s still worth making use of them as all future earnings are tax-free.
Just make sure you don’t withdraw funds in the short- to medium-term.
If you take money out, you can’t replace it. What you’ve already paid in contributes towards your limit amounts.
You can use TFSAs for savings and investing in products, including exchange traded funds (ETFs) and a wide selection of unit trusts.
The Plusses of TFSAs
Just like RAs, there are benefits on top of the tax advantages…
- By contributing regularly, you’ll benefit from compounding growing your money over the years.
- If you have substantial investments or savings, from a tax perspective, it’s beneficial to make use of your TFSA allowance.
- And by respecting the rules that govern these accounts, you should find it makes you more disciplined with your saving and investing.
If you'd like to find out how you can use your TFSA to get the government to pay for your retirement, you have to check this out.
How To Pay Less Tax Step #3: Investing In Property
Property appeals to many investors who want to put their money to work over the long-term.
Whilst the initial outlay is large with such an investment, there are ways you can save on tax.
The first thing to consider is the type of property you’re buying.
If you buy a property below R750,000, you’re exempt from paying transfer duty.
In other words, by focusing on this sector of the market, you avoid this tax.
The cheaper end of the market also has other benefits that will save you money on tax.
Capital Gains Tax
Selling a cheaper property also means your liability for capital gains tax is less.
But that isn’t the end of the tax benefits.
Tax On Rental Income
There are other ways to reduce the tax you’ll pay on your rental income…
- You can offset interest costs on your investment property’s bond against the income you receive from renting it out.
- You can offset a number of things against your income, including insurance, rates and taxes. You can read the full scope of what you can deduct from your rental income here.
If you opt to invest in property, it’s worthwhile speaking to a tax professional to ensure you take full advantage of the tax benefits.
How To Pay Less Tax Step #4: Careful Portfolio Management
If you have a substantial investment portfolio, selling profitable holdings could mean you’re liable for capital gains tax (CGT).
At the moment, you can make a capital gain of up to R40,000 a year without having to pay tax on it.
But, if you sell large profitable holdings, chances are you’ll have to have to pay CGT.
If you have a portfolio containing a few laggards you want to cut free, you could sell these in the same year as taking profits from your portfolio.
Any capital losses will offset against your capital gain, lowering your tax liability.
It’s well worth speaking with a tax consultant before making any significant changes to your portfolio.
It could save you a lot of money in tax.
The Importance of Minimising Tax
The more wealth you have, the more important it is to make the most of tax saving methods.
Over the years, you can save yourself significant amounts of money.
If you’re unsure about what’s best for you, whether it be for retirement planning or managing your portfolio in a tax efficient way, employ the services of a financial advisor or financial planner.
Whilst you’ll pay for these services, getting good advice will pay off over the years ahead.
Until then, here’s to tax free investing.
The Money Lab
PS: Discover the secret to paying less tax AND how to get SARS to pay for your retirement at the same time! It's all in this FREE report titled "The Tax Free Playbook", you just need to let me know where to send your copy!