South Africa: Budget Likely To Reform Tax Relief On Pensions And Savings

Last Updated: 6 June 2013
Article by   KPMG

Pravin Gordhan, South Africa's Minister of Finance is expected to announce in his Budget speech later this month the substantial reform of the tax concessions currently available to individuals with respect to their pensions and savings.

Currently, employer contributions to pension and provident funds are not taxed as a fringe benefit, whilst individuals are afforded a deduction for contributions to pension funds and retirement annuity funds (RAFs). The tax-free contribution by employers is effectively unlimited, although the tax deduction for the employer is limited to 20 percent of 'approved remuneration' per annum. The employee's pension deduction is limited to 7.5 percent of pensionable earnings, and the RAF deduction is limited to 15 percent of non-pensionable earnings. 

Once contributions are in the funds, all income, gains and growth are effectively tax-free.

When lump sums are paid out from these funds, concessional tax tables then apply, rather than the standard income tax table. Contributions to the fund for which the taxpayer did not receive a tax deduction (for example Provident Fund contributions, or pension contributions over the prescribed limit) will reduce the taxable amount of the lump sum received. Withdrawals prior to retirement are afforded a R22 000 exemption, thereafter the tax rate starts at 18 percent, rising to 36 percent once cumulative lump sum receipts exceed R900 000.

Retirement withdrawals receive more generous exemptions, with a nil tax rate up to R315 000, and the 36 percent rate kicking in at R945 000. It should be remembered, however, that these tables are cumulative during a person's lifetime with respect to all withdrawal, retirement and severance lump sums. Annuities however are taxed at normal marginal rates (currently topped at 40 percent on taxable income over R617 000 per annum).

From an employee's perspective, the predicted reforms largely concern the tax concessions currently applicable to employer and employee contributions.

National Treasury has proposed to include all employer contributions to all fund types as a taxable fringe benefit in the relevant employee's taxable income. To neutralise the tax impact of this, however, the employee shall be allowed a deduction of up to 22.5 percent of remuneration or taxable income (i.e. the combination of the current 7.5 percent and 15 percent caps, but applied to all earnings, with no distinction between pensionable and non-pensionable portions. The cap will increase to 27.5 percent for taxpayers 45 years or older). In calculating this deduction, the employee may treat the employer's contributions as their own, so that the employer contribution fringe benefit and deemed deduction for that contribution will cancel each other out, and the employee's contribution will remain tax deductible.

Note that this means employee contributions to Provident Funds will become tax deductible. The employer shall be afforded an unlimited tax deduction for its contributions.

If the reforms stopped there, it would be a much welcomed simplification of the rules.  The reforms will go further however, and propose that a monetary cap be placed on tax deductible contributions, in addition to the 22.5 percent cap. For taxpayers up to 45 years of age, the proposed cap is R250 000 per annum, with a R300 000 per annum cap for older taxpayers. In effect, taxpayers under 46 with taxable income in excess of R1.1 million per annum will not be able to use their entire 22.5 percent pension contribution limit.  Contributions in excess of the limits, for which the taxpayer received no tax deduction, will reduce the taxable lump sum and/or annuity on withdrawal/retirement.  While this is sensible, it ignores the time value of that money and may become a disincentive to invest in retirement funds once the caps are reached.

Despite lobbying on the issue, Treasury appears fixed in its intention to retain the proposed monetary caps. The apparent disincentive for higher-earners has been dismissed as only impacting a few thousand individuals. That may be so, but those few thousand individuals pay a disproportionate amount of the tax collected in South Africa, and also contribute substantially to the country's savings pool.

Therefore, it is possible that the level of the proposed monetary caps may be reconsidered in the Budget.  We could also see the effective date being moved forward to 1 March 2013, as this legislation has been on the cards for two years already. 

  With regards to foreign pensions, there is good and bad news. The exemption available to foreign retirement annuities earned from past foreign employment is likely to be extended to foreign retirement lump sums. Furthermore, whilst non-residents will be permitted the same deduction for their local pension contributions as is afforded to residents (a recent change in policy), any contributions to foreign schemes will be non-deductible for tax purposes.  This will mean that employers contributing to foreign schemes, for example on behalf of their expatriate employees (who typically remain in their home employer's pension scheme), will see this become a taxable benefit with no tax relief, unless a Double Tax Agreement applies, for example the respective double taxation agreements with the US and UK.

If the expatriates are tax equalised, as is often the case, this will potentially be a massive additional gross-up cost to employers, and effectively a tax on bringing foreign skilled workers to South Africa.  This may not have been the Minister's intention and it is hoped that the Minister will reconsider this aspect of the proposed legislative changes.

On the subject of encouraging non-retirement savings, National Treasury has also been busy. The most significant proposal is the introduction of tax-free savings products, very similar to the hugely popular Individual Savings Accounts (ISAs) in the UK.  Individuals will be permitted to invest up to R30 000 after-tax per annum in these accounts.  The growth and income accruing on the accounts will be exempt from income tax and capital gains tax, as will any withdrawals from the account, however, amounts withdrawn cannot be replaced in addition to the R30 000 per annum. Two types of tax-free account will be approved; interest-bearing, for example cash and bonds, and equity-based, for example unit trusts. A lifetime contribution limit of R500 000 is also proposed.

While this is good news, it comes at a cost. The current interest exemption up to R22 800 per annum is proposed to be phased out to make way for the new accounts.  Consequently, anyone earning interest outside of one of the approved accounts will be subjected to income tax on that amount. The tax-free interest exempted on the new accounts will likely never compensate for the loss of the current exemption. For example, even once a person has contributed their maximum R500 000 (which will take over 16 years at R30 000 pa), the tax-free interest earned at, say, five percent will be only R25 000 per annum. When combined with the recent dividends tax, it is unwelcome news for many investors. It remains unclear how older investors will be able to move their current savings into the new accounts. 

While government's focus on encouraging savings is welcome and needed, we hope to see the current proposals tweaked to better achieve their aims when the Minister hands down his Budget on 27 February 2013.

Ultimately, the objective is to encourage taxpayers to save so that they can support themselves in retirement, rather than rely on the state, leaving more money in the pot for government to use on the various spending initiatives in the National Development Plan.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.