Medical aid tax credits bring equality into the tax system

Good news for employees countrywide is that the new medical aid tax credit system that replaced the capping system from the beginning of March this year, will ensure that they all receive equal benefits. The greatest benefit goes to employees whose earn

Lloyd gives two examples to illustrate how the medical aid tax credit helps employees:

John earns R10 000 a month and contributes R1 000 towards his medical aid. He is 27 years old, single with no children. With the old capping system, John would qualify for a R720 medical aid cap applied as a deduction against his salary of R10 000, so his PAYE would be calculated on R9 280.

His total annual remuneration value placed him in the lowest earnings bracket, meaning that his marginal tax rate was 18%. He would have received 18% of his R720 medical aid cap, a reduction of just R130 in his PAYE because of his medical aid contribution. But with the new tax credit system that is now in place, John’s PAYE reduction will amount to R230, putting an additional R100 in his pocket every month.

Mary earns R25 000 per month and contributes R1 000 towards her medical aid. She is 25 years old, single with no children. Under the old capping system she qualified for a R720 medical aid cap which meant her PAYE was calculated on R24 280. Her total annual remuneration was subject to a marginal tax rate of 30%, resulting in a PAYE reduction of R216 which is 30% of the R720 medical aid cap.

“These examples show how the old medical aid capping system can be considered unfair,” says Lloyd. “Although both John and Mary contributed the same amount towards their respective medical aids, Mary enjoyed a greater benefit because her earnings were higher.

“With the tax credit system having taken effect from 1 March 2012, both John and Mary will receive the same reduction of R230 in their PAYE liability, regardless of their earnings, which is a more equitable situation.”

Lloyd emphasizes that companies need to ensure that they apply the new medical aid tax credit calculations on all payslips processed from the beginning of March this year. “Those using automated payroll solutions should already have the parameters and calculations that apply to the medical aid tax credit in their systems.”

Attend the 2012/13 Medical Aid Seminar hosted by Softline Pastel and find out how the new Medical Aid Tax Credit method will affect your payroll. To read more, go to http://www.pastelpayroll.co.za/Pastel-Payroll-Software-Training/Seminars/Medical-Aid-Seminar.asp