8
HOW THE INCOME TAX BRACKETS WORK
MONEY BASICS
with MARTIN HESSE
THERE is a common misunderstanding about income tax, which goes something like this: you are due for a raise but are worried that the raise (which may be relatively small) will push you into a higher tax bracket, and this will cancel out the raise because of the higher percentage of your earnings going to the taxman. In fact, you may be worried that you might get out less after tax than you were getting before. But that is not how the brackets in the South African Revenue Service’s income tax tables work (see table on opposite page). A jump to the next bracket will never result in a reduction in income going into your pocket. As you can see from the tax table (which applies to the 2022/23 tax year), the brackets are 18%, 26%, 31%, 36%, 39%, 41% and 45%. If, say, you fall
into the 36% bracket, you are not paying 36% on all your income; you are paying 36% only on anything you receive above R488 700. You are taxed in steps. Picture the brackets as rungs on a ladder: you are taxed less on income that falls into the lower rungs than income that falls into the higher rungs. For example, say that, after deductions, your taxable income for the year is R500 000. You pay tax of: ● 18% on the first R226 000 – R40 680 ● 26% on the next R127 100 (which is R353 100 – R226 000) – R33 046 ● 31% on the next R135 600 (which is R488 700 – R353 100) – R42 036 ● 36% on the next R11 300 (which is R500 00 – R488 700) – R4 068
● Total tax before rebate: R119 830. ● Total tax after the primary rebate of R16 425: R103 405. ● Percentage of R500 000 going to SARS: 20.68% The actual percentage of your income going to SARS is known as your average tax rate. The rates indicated in the table are known as the marginal rates. So, to recap, on a taxable income of R500 000, your marginal rate is 36% (meaning that you are in the bracket whereby any additional income you accrue is taxed at 36%), whereas your actual, or average, rate is 20.68%. What if your income had been R480 000 – in other words, you fell within the 31% marginal bracket? We don’t have to go through all the sums again, because SARS has worked them out for
