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Tax deductions of a retirement annuity for different income levels

Retirement annuity contributions are tax deductible in South Africa. That means, you pay less tax when you invest in a retirement annuity. However, are they really worth it for everyone? If you earn R7 500 per month, do you even qualify for any tax deductions? What about if you earn R40 000 per month? What about R100 000?

How tax deductions work

If you earn income from your job, you pay tax on that income. But, SARS allows you to deduct investments made into your retirement annuity from your taxable income. That means, you pay less tax.

Example:

Amount
Monthly salaryR40 000
less retirement annuity investmentsR5 000
Taxable incomeR35 000

You earn R40 000 per month. You decide to invest R5 000 into a retirement annuity. SARS will not tax you on the R40 000. Instead, you only pay tax on R35 000. The contribution you made to the retirement annuity reduces your taxable income. And you pay less tax.

Here is what you would pay. Tax on R40 000 is R7 839. However, since you contributed R5 000 to a retirement annuity, you only pay tax on R35 000. Tax on R35 000 is R6 289.

So you end up saving R1 550 per month in tax by investing R5 000 into a retirement annuity .

Key takeaway #1.
Investing in a retirement annuity allows you to save tax.

Just how much tax can you save?

You save tax by investing in a retirement annuity. But, the amount of tax you save depends on your income level.

This table shows how much tax you save per month for a R5 000 retirement annuity contribution for different levels of income.

Table & Chart: Tax savings per month for a R5 000 RA contribution for different income levels

IncomeRA ContributionTax Savings
R7,500 per monthR5,000 per monthR0 per month
R10,000 per monthR5,000 per monthR364 per month
R25,000 per monthR5,000 per monthR1,300 per month
R40,000 per monthR5,000 per monthR1,550 per month
R65,000 per monthR5,000 per monthR1,950 per month
R80,000 per monthR5,000 per monthR2,050 per month
R100,000 per monthR5,000 per monthR2,050 per month
R150,000 per monthR5,000 per monthR2,050 per month
R200,000 per monthR5,000 per monthR2,250 per month
Key takeaway #2.
If you earn less than R7 500 per month, you will not save any tax by investing in a retirement annuity.
Key takeaway #3.
The more you earn, the more you can save in taxes by investing in a retirement annuity.

But, there is a limit to tax deductions.

SARS allows you to deduct a maximum of 27.5% (or R350 000) of all your income from your taxable income. You are still allowed to invest more than that, but the excess will not be deductible.

Monthly IncomeMaximum Monthly RA Contribution (27.5%)Annual Contribution
R7,500R2,063 R24,750
R10,000R2,750 R33,000
R25,000R6,875 R82,500
R40,000R11,000 R132,000
R65,000R17,875 R214,500
R80,000R22,000 R264,000
R100,000R27,500 R330,000
R150,000R41,250R350,000 (Capped)
R200,000R55,000R350,000 (Capped)
How to read this table. If you earn R7,500 per month, you can contribute a maximum of R2,063 per month to a retirement annuity. In a year, that amounts to R24,750.
Key takeaway #4.
SARS limits the amount you can deduct from your taxable income to 27.5% of your income or R350,000 per year.

Maximum tax savings from retirement annuity contributions

Just how much tax could you save in taxes by maximizing your retirement annuity contributions? SARS allows you to invest up to 27.5% of your income (capped at R350,000 per year) and deduct it from your taxable income. This table shows the maximum tax savings you can achieve for different income levels .

Monthly IncomeContribution AmountMaximum Monthly Tax SavingsAnnual Tax Savings
R7,500R2,063R0R0
R10,000R2,750R364R4,365
R25,000R6,875R1,657R19,882
R40,000R11,000R3,316R39,795
R65,000R17,875R6,703R80,430
R80,000R22,000R8,750R105,002
R100,000R27,500R11,275R135,300
R150,000R29,167R11,958R143,500
R200,000R29,167R13,125R157,500
Key takeaway #5.
Tax savings from retirement annuity contributions can be substantial. For example, if you earn R40 000 per month, you can save R3 316 per month in tax.

Summary

Here are the key takeaways from this article:

For Low Incomes (Below R7,500/month):

  • No immediate tax benefits from RA contributions
  • This is because earnings fall below the tax threshold

For Lower-Middle Incomes (R7,500 - R25,000/month):

  • Tax savings begin to appear but are modest
  • Monthly tax savings typically range from R100 to R1,000
  • Good time to start building retirement savings habits

For Middle Incomes (R25,000 - R45,000/month):

  • Tax savings become more substantial
  • Can contribute up to 27.5% of income for meaningful tax benefits
  • Monthly tax savings range from R1,000 to R2,500

For Upper-Middle Incomes (R45,000 - R65,000/month):

  • Significant tax benefits due to higher tax bracket
  • Monthly tax savings typically range from R2,500 to R5,000
  • Important to optimize contribution amounts

For High Incomes (Above R65,000/month):

  • Maximum tax benefits due to highest tax bracket
  • Need to watch R350,000 annual contribution cap
  • Can save substantial amounts in tax (R5,000+ monthly)
  • Strategic planning needed to optimize benefits
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