Proposed new tax credit system makes medical aid schemes more accessible to lower income earners

Jan Howell, Consulting Actuary at OMAC Actuaries & Consultants

Changing the tax treatment of contributions to a medical scheme from a tax deduction system to a tax credit system will make medical scheme membership more financially accessible for low-income earners.

This is according to Jan Howell, Consulting Actuary at OMAC Actuaries & Consultants, who says the changes proposed in the Budget Speech last month will produce a more equitable system as the top income earners will get a smaller tax benefit and low income earners will get a larger one. “This is especially so if combined with a scheme offering lower contributions on the lower income bands,” he says.

Howell illustrates his point in the graph below which represents a family of two with monthly medical scheme contributions of R1440 or more. The graph relates to members younger than 65 with no tax benefit derived from out of pocket medical expenses.

“In 2011, the top income earners received the biggest tax benefit for contributions made to medical schemes. This is shown by the blue line indicating the tax deduction system. However, in 2012 as shown by the red line (tax credit system), the top income earners will qualify for a smaller tax benefit, and the lower income earners will receive a larger one,” explains Howell.
 (Click on image to enlarge)

According to Howell, the change in an individual’s personal tax benefit will depend on family size, income (i.e. your marginal tax rate) and the size of your medical scheme contribution.

For example, the graph below illustrates the changes in the tax benefit for a family with two members belonging to the medical scheme. The different coloured lines represent different medical scheme contribution rates (the graph for a contribution of R1440 per month is the same for all contributions higher than this).
 (Click on image to enlarge)

“It’s clear that the biggest increase in tax benefits is given to people earning up to R150 000 per annum. Thereafter it decreases – so that some people will eventually get a reduction in their tax benefit,” says Howell.

The impact on tax benefits is simliar for a family with four members belonging to a medical scheme – as illustrated below.
 (Click on image to enlarge)

“This new tax structure is an encouraging development as it will relieve financial pressure on lower income medical scheme members and make medical schemes more affordable for them. OMAC can assist employers to communicate well to their uncovered employees to enable them to understand this change and thereby make informed healthcare decisions,” says Howell.