How Sars has changed tax for annuitants

A change introduced by the South African Revenue Service (Sars) came into effect on 1 March 2022, requiring annuity providers, including Allan Gray, to withhold a fixed tax rate higher than the rate we apply based on the personal income tax table for some clients’ Allan Gray Living Annuity income from the 2022/23 tax year.

The change aims to reduce the tax shortfall clients may face at the end of the tax year by applying fixed tax rates calculated by Sars (which considers the multiple sources of income they may receive) to living annuity income.

What has changed?

Tax on living annuities is a pay-as-you-earn (PAYE) tax that is withheld by an annuity provider according to the tax rate prescribed by the personal income tax table, taking the annual tax rebates into account.

Until recently, annuity providers have withheld tax as if the annuity (or annuities) under their administration were their clients’ sole source of income.

Annuitants can instruct their annuity provider to apply a higher tax rate and withhold additional PAYE tax from their annuity income if they wish to compensate for different sources of income.

Some taxpayers may also hold a reduced-rate directive issued by Sars (to deduct or withhold a lower rate of PAYE tax) for the tax year. This may be, for example, to alleviate hardship due to circumstances outside the taxpayer’s control, or the directive may be issued to avoid double taxation.

As of 1 March 2022, annuity providers will be required to withhold tax for select living annuity clients at a rate that is determined by Sars considering multiple sources of income. For these clients, Sars will instruct annuity providers on the rate to use via a fixed-rate tax directive.

Taxpayers may still instruct their annuity providers to apply a higher effective tax rate to their annuity income, and reduced-rate tax directives issued by Sars for the current tax year will supersede the new fixed-rate directives.

This change may impact taxpayers who receive annuity income from more than one provider and/or those who receive a salary and annuity income.

Why has this been done?

Consider a taxpayer who earns a salary from their employer and receives a monthly annuity income from their Allan Gray Living Annuity. Both their employer and Allan Gray will deduct PAYE tax from the income they administer, which is calculated by applying the personal income tax table and annual tax rebates to that income to determine how much PAYE tax to withhold and pay over to Sars on the taxpayer’s behalf. As the employer and Allan Gray do not have sight of the income the taxpayer receives from the other party, they calculate the PAYE tax liability based on the income they administer, and each party applies the annual tax rebates when this should only be applied once per taxpayer per tax year.

When a taxpayer files their tax return at the end of the tax year, Sars looks at all income earned during the year.

In this example, in addition to the annual tax rebates being applied twice, the salary and living annuity income combined may push the taxpayer into a higher personal income tax bracket with a higher effective tax rate than that calculated by each income provider.

Sars will calculate the overall tax liability when assessing the taxpayer at the end of the tax year and will deduct the PAYE tax that the employer and Allan Gray withheld throughout the year to determine if there is any difference.

If the calculated PAYE tax due exceeds that which the employer and Allan Gray withheld during the year, the taxpayer will be required to pay in the additional tax on assessment. They may not be expecting this additional tax liability, nor have budgeted for it, as they may have assumed that each income provider withheld the required amount of PAYE tax from the income they paid.

Although taxpayers are able to instruct annuity providers to apply a higher effective rate that takes multiple income sources into account, not many make use of this solution. Some are unaware that this scenario may lead to a tax shortfall on assessment; others may have difficulty calculating their overall tax liability or may not know that this option exists.

How have these rates been calculated?

The fixed tax rates issued to annuity providers have been calculated by Sars based on the latest available data they have from employers and annuity providers.

In calculating the fixed tax rates, Sars took all sources of income, as well as the annual tax rebates, any retirement fund contributions, and medical tax credits into account.

The rates were updated in March 2022 to take the updated 2022/23 personal income tax table and annual tax rebates into account.

It is important to note that Sars only took employment income into account in the calculation of the fixed tax rates (such as salary income and living annuity income) and did not consider other income sources, such as rental or interest income. This means that if you earn income from other sources in addition to employment income, you may still need to pay tax over to Sars when you file your return at the end of the tax year.

This change from 1 March 2022 does not affect salary income, and the PAYE tax withheld by your employer will not be impacted; only annuity income will be impacted. Going forward, annuity providers will receive updated tax directive lists from Sars annually to be applied to the annuity income they administer for the applicable tax year.

Am I impacted, and what if I opt out?

If you are a provisional taxpayer (earn income other than employment income), it is unlikely that you will be impacted by this change. In other words, it is unlikely that Sars would have issued a fixed-rate directive in relation to your annuity income. This is because provisional taxpayers estimate and prepay their tax liability for the year and can settle any shortfall in PAYE tax relating to their annuity income through the provisional payment process.

If you appeared on the Sars fixed-rate tax directive list that Allan Gray received, we would have communicated the tax rate that Sars has instructed us to apply to your living annuity income for the current (2022/23) tax year to you.

You can elect not to have the Sars fixed tax rate applied to your annuity income. If you opt out of the Sars fixed tax rate, we will calculate the PAYE tax we withhold as we have done previously. In other words, as if your Allan Gray Living Annuity income payments were your only source of income.

You can opt out of the Sars fixed rate at any point throughout the tax year, which is helpful to know if your circumstances change (for example, if you change your income drawdown percentage on your next anniversary date), or if you find you are unable to sustain the additional upfront tax liability during the year.

Before deciding whether or not to opt out of the fixed rate, we recommend that you perform your own calculations, taking your multiple sources of income into account, to determine whether the Sars fixed tax rate to be applied to your annuity income for the 2022/23 tax year is suitable, or you feel it is too high (which will result in a refund on assessment) or low (which will still result in an additional tax liability on assessment). These calculations can be complicated and contain many moving parts.

If you have appointed a financial adviser and/or tax practitioner to assist with your tax matters, it is important that you consult them so that they can advise you on the best course of action, taking all your individual factors into consideration.

It may be helpful to look at the effective tax rate you paid for the previous (2021/22) tax year to give you a sense of the impact of the higher effective tax rate on your take-home annuity income, and whether you are able to afford to pay this additional tax liability upfront or prefer to settle any additional tax liability at the end of the tax year.

Also consider expected tax deductions and rebates for the current tax year, such as retirement fund contributions and medical tax credits, in your calculations. While Sars took retirement fund contributions and medical tax credits into account in calculating the fixed tax rate, these values were based on the latest data available to Sars. Therefore, if you have since increased or plan on increasing your retirement fund contributions, for example, or expect to benefit from an additional medical expenses tax credit this tax year, this may offset some of the additional tax liability.

Additionally, if you have excess retirement fund contributions on record with Sars, these will be applied on assessment to reduce the taxable portion of your annuity income, which may also result in a reduced PAYE tax liability and refund.

As an annuity provider, we do not have in-depth insight into how Sars performed the calculations to arrive at the taxpayer-specific fixed tax rates for the 2022/23 tax year.

If you, your financial adviser and/or tax practitioner have any questions or concerns regarding the Sars fixed tax rate, we encourage you to contact Sars for more detail and assistance.

Remember that you can opt out if you are concerned about the accuracy of the Sars fixed rate, or while you wait for feedback from Sars on any questions you may have.

It is important to understand the impact of the SARS fixed tax rate on your cash flow and to be aware of your options.

Carrie Norden is a senior tax specialist at Allan Gray.

This article was first published on Allan Gray’s website and is republished here with permission.

Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies.

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