These days your salary package is quoted as cost-to-company. This means that your actual pay as well all the benefits should not exceed the CTC amount. It gives you some flexibility in deciding in how your salary package will be structured but it can be confusing at times, especially if you are not financially-inclined. The question that most employees have is “how can I get the highest take-home pay while paying the least amount of taxes?”. Your retirement annuity, pension/provide fund contributions, medical aid and income protection are some of the tax deductions that provide you with financial protection.
Medical Aid As Part Of Your Package
Firstly, your employer is not obligated to subsidise your medical aid contributions. Larger companies often do so but it is important to clarify whether this is part of the CTC amount. Sometimes it is. Even if not, you still have to factor in how much you are prepared to pay for medical aid cover. Rather than only looking at the tax deduction aspect of your medical aid premium, consider the level of cover that you would like to have. It may consume more of your package and lower your take-home pay. But at the end of the day good medical aid cover is essential in South Africa, especially if you or your dependants have health problems.
Consider whether you want a full medical aid (comprehensive cover with day-to-day benefits) or just a medical aid hospital plan. While chronic cover is included in both options, you will need to pay for your day-to-day medical expenses from your own pocket if you opt for a hospital plan only. Can you afford several visits to your GP in a month? What about a medical specialist? Do you know how much blood tests, scans and scopes could cost you? If you do not think that you can afford these costs without medical aid, then rather choose comprehensive cover. You will pay more every month and it will lower your take home pay. But it will protect you against exorbitant private healthcare costs in South Africa.
Medical Aid Tax Benefits
Your entire medical aid premium is not tax deductible unless you are over 65 years of age or a person with disabilities. Prior to 1 March 2013, your tax benefit for your medical aid contributions was capped. At the time it stood at R720 for the first two beneficiaries, like you and your spouse. Then there was an additional R440 for other beneficiaries. These capped amounts meant that even if you paid medical aid premiums of R2,000 per beneficiary, you could only claim back the capped amount.
In other words, the capped amount was deducted from your gross salary (CTC) amount, along with other tax deductions, and then the tax rate was applied to the remaining amount. After removing the tax, you then had your take home pay. These tax capped amounts essentially reduced your taxable income. The lower your taxable income, the lower the tax you pay. At the time your employer may have gained a greater tax advantage by contributing towards your medical aid premiums.
Medical Aid Tax Credits
Since 1 March 2012, the tax credit system came into place and replaced the capped tax benefits for medical aid contributions. Tax credits essentially reduce the your tax liability – the amount that you owe to SARS (South African Revenue Services) in tax. The purpose of the tax credit system is to make it fair for all income groups so that all taxpayers could benefit for paying their medical aid contributions. These tax credits are only applicable to people under 65 years of age. People older than 65 years still receive the full tax benefit as was previously the case.
Now your employer’s entire contribution to your medical aid is considered as a fringe benefit meaning that the entire amount your employer pays, not only the amount exceeding the capped amount, will be subjected to PAYE. By applying tax credits, people from lower income groups who are paying the same medical aid premiums as people in high income groups will receive a greater tax benefit. However, people who are in the high income groups will find a moderate increase in tax meaning that medical aid deductions are slightly less of a tax benefit now than it used to be in the past.
Structuring Medical Aid in CTC
Before you structure your package, you should speak to an accountant or tax consultant. Your company’s human resources department may be able to help you better understand the tax implications of your medical aid choice. Consider aspects of opting either for cheaper medical aid or more expensive cover. It will impact on your take-home pay and disposable income but it is important to look into the future. Private medical care in South Africa is not cheap and you will only appreciate the benefit of a higher plan on your medical aid when you fall ill with a serious disease.
Do not get distracted by the tax saving entirely. While we all want to pay as little tax as legitimately possible, sometimes you have to lose in one area to benefit elsewhere. So it is important to see the bigger picture, especially when it comes to your medical aid. Good medical care can make the difference between life and death.