Thread by @stealthy_wealth

How to calculate your income tax

[Thread]

Income Tax is a tax which is charged on your income (I have not idea how they came up with the name!)

So in short, income tax is a percentage of your income which you pay over to SARS.

South Africa has what is called a progressive income tax system (not to be confused with an aggressive tax system).

That means the more income you earn, the higher your tax % will be.

Your total income is taxed according to the following table (available on the SARS website here -> sars.gov.za/Tax-Rates/Inco…

This is for the 2021 tax year (the one which ends 28 Feb 2021)

As you can see, different tax rates apply according to your taxable income.

Your taxable income also determines what the cool kids call your "marginal tax rate" - that's just the percentage listed in the row you find yourself in.

Okay, let's apply the tax table to an example.

For someone with total taxable income of R250k for the year, the 2nd row applies (and marginal tax rate will be 26%)

Using the table:
Tax = R37,062 + 26% of taxable income above R205,900
Tax = R37,062 + 26% of R44,100
Tax = R48,528

That seems like a pretty steep tax bill! But the next important thing to know about is the income tax rebate.

This is money that SARS gives you back.

The value of the annual rebate is also listed on the SARS website -> sars.gov.za/Tax-Rates/Inco…

If you are under 65, you get the Primary rebate.

If you over 65 and 75, you get additional rebates.

Let's stick with a under 65 year old for our example. From the table above, they get a rebate of R14,958.

This means their total tax is:

R48,528 - R14,958 (rebate)
= R33,570

And their effective tax rate (percentage of their income going towards tax) is therefore:

R33,570/R250,000 = 13.4%

And at this point I would also like to clear up what seems to be a pretty common misconception

Someone earning more than R1.5 Million DOES NOT pay 45% tax.

The 45% is only charged on the income above R1,577,300

E.g. let's say there's a big cheese with taxable income of R2 Million.

Using the tax tables, they will pay R734,721 in tax
Effective tax rate = 36.7%

It's still a massive tax bill, but they not paying 45% tax.

So as you can see, once you know your taxable income, you just use the tax table and rebate table to calculate your income tax which is due.

So now all that's left to figure out is what makes up your taxable income?

Taxable income can come from:

- A Salary
- Rental income (after deducting related expenses)
- Interest above R23,800 (for under 65) - (see here sars.gov.za/Tax-Rates/Inco…)
- Dividend income from REIT Investments
- 40% inclusion of Capital Gains (see below)

https://twitter.com/stealthy_wealth/status/1272404753532805121?s=20

And remember, you are allowed to deduct certain payments from your taxable income before applying the tax table.

Examples of allowable deductions:

- Contributions to an RA
- Contributions to a Pension/Provident fund
- Contributions to a SARS registered charity