Have you considered the impact of a potential tax hike in 2018?

Priya Naicker, Advice Manager at Old Mutual Personal Finance.

Unpacking topical issues and how they impact ordinary South Africans.

What’s in the news?

Following the Finance Minister’s Medium Term Budget Policy Statement (MTBPS), there has been widespread speculation on the likelihood of tax hikes in 2018. Although increases in taxation, most likely to be in VAT, are generally considered not to be conducive to economic growth, they may be deemed necessary to address the current R49 billion tax shortfall, the biggest revenue gap since 2009.

How would this impact you?

If an income tax increase or rise in the VAT rate is announced in February 2018, your disposable income will shrink. Many South Africans will be forced to further tighten their belts in an attempt to make ends meet and avoid going into or falling deeper into debt. To prepare for this possibility, consumers should consider cutting back on spending, particularly on unplanned and unnecessary purchases. Now is the time to focus on reducing your debt and increasing your savings to ensure you are on track to achieve your financial goals.

What tax efficient vehicles are available to you?

Consider exploring short, medium and long term solutions that will help you achieve your financial goals. In the short and medium term look at saving towards an emergency fund in a flexible savings vehicle. Tax Free Savings Accounts (TFSA) offer tax free growth, no tax on withdrawals and an annual contribution limit of R33 000 per individual or R500 000 over a lifetime.

For the longer term, a Retirement Annuity, while it offers limited liquidity, comes with other benefits such as income tax advantages in that contributions are tax deductible up to certain limits. Currently a combined deduction exists for contributions made to pension, provident and retirement annuity funds of 27.5% of the greater of remuneration or taxable income, capped at R350 000 per annum.

Growth within the retirement annuity is also free of tax, although tax is payable when accessing the benefit, from age 55. When accessing your funds at retirement, at this stage up to a third of the fund value may be taken in cash (unless the total retirement interest per fund is currently less than R247 500) and the balance must be used to purchase an annuity. It is important to consult a financial adviser to assist you in reaching your financial goals by finding the right solution for your specific needs, taking into account your personal financial circumstances.

On a personal note

Being proactive and self-disciplined with your money is an essential stepping stone to financial empowerment. Openly evaluate your expenses and have candid discussions with your family about money management. An objective professional, like a financial adviser, can help you evaluate your finances and empower you to make informed decisions. Partner with a financial adviser who can work with you to prepare for a potential tax hike and determine a realistic budget to ensure that you stay on track to meet your medium and long-term financial goals.