As we approach the end of February, you’ll start hearing two words a lot: “budget” and “tax”.
This is the time when the minister of finance delivers the national budget speech, outlining the government’s money plans for the following 12 months; plans that hinge almost entirely on taxpayers’ money. If you’re a provisional taxpayer, February is also when the SA Revenue Service (Sars) asks you nicely to hand over a chunk of your earnings.
Budgets and tax go hand-in-hand, at national level and at domestic level. The start of a new year is a great time to channel your inner Tito Mboweni and assess your own personal budget. And even if you only pay your taxes annually in June, it’s also a good time to evaluate how you’re paying tax, and see whether you can better align your tax with your budget.
Don’t be daunted. The word “budget” might seem terrifying, but explained in simple terms it’s just a plan to spend and save, usually for a defined period. Budgets are made by organisations, governments, individuals and households.
The important thing to remember is that a budget shouldn’t be rigid; it has to be revisited regularly and it must be able to evolve depending on circumstances. Take Mboweni’s speech, for example. This year, he has the unenviable task of explaining how he plans to dig SA out of its economic hole, and how the country will fund the critical Covid-19 vaccine rollout. Covid wasn’t even on the agenda at last year’s speech! This year’s budget will be entirely new.
It might be the same for you – this year’s budget might be totally different to last year’s. You might have been planning to buy a new car and now your salary has frozen because of the pandemic, so the new car will have to wait. There are more essential items that have higher priority.
When you’re setting your budget, it’s best to apply a template or a method. At Imvelo Wealth, we recommend the 50-30-20 rule: 50% of your monthly income should go towards paying for your needs, non-negotiable things like rent, electricity, groceries, insurance and transport costs; 30% should go towards your financial goals – your retirement annuity, emergency fund and paying down your debt; and 20% should go towards nice but non-essential things like entertainment, personal care, gifts ... and that new car.
The hardest part of a budget, for most people, is allocating your expenses to these categories and then tracking how you’re doing and changing your behaviour accordingly. This was a real mission in the old days, but technology has come to the rescue. There are various budgeting apps on the market, some of which even integrate with your bank to create reports and give you a realistic picture of how you’re spending your money.
The tax riddle. Tax is the government’s main source of revenue, and the Treasury is always shifting the goalposts as it looks for new ways to squeeze everyday South Africans. New laws are continually being signed into existence, some of which have serious consequences for high net-worth individuals.
If you’re playing in the big leagues, we recommend you hire a tax professional to advise on all the new regulations. But for mere mortals, the important message with tax is that the classic incentives remain unchanged – designed to encourage South Africans to save for retirement and other long-term goals.
When it comes to your retirement, for example, you can contribute up to 27.5% of your annual income, or a maximum of R350,000 – both per year – to a pension, retirement annuity or provident fund, and that amount will be deducted from your taxable earnings. Returns on retirement investments are tax-free. Similarly, you can invest up to R36,000 per year, to a maximum lifetime amount of R500,000, into a tax-free savings or investment account. This will also deliver tax-free returns.
Take advantage of these tax incentives, by all means, but not to the detriment of your children’s school fees or your monthly grocery shop. That’s the balancing act that your budget needs to pull off, and it’s something that a certified financial planner gets really excited about! If you’re not sure where to start, or if you need some help restructuring an existing budget to accommodate tax savings or investment goals, set up a meeting today.
• Tlholoe CFP is co-founder and a wealth manager at Imvelo Wealth Solutions
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