SARS tax directive enhancements – PAYE on pensions

SARS tax directive enhancements – PAYE on pensions

Business, Legislation, Tax

In early November 2021, SARS published a document entitled ‘Implementation of tax directive enhancements’. This explained the enhancements made to the directive system that would deal with pensioners with more than one source of income.

SARS states that where a pensioner has one source of pension income, the PAYE system ensures that sufficient tax is deducted to cover the annual tax liability. Where the pensioner has two sources of income, a tax debt may arise at tax year-end when all sources of income are combined to determine the annual tax liability. SARS states that the PAYE system allows for a pensioner to request that a higher rate of tax be deducted from their pension, but that very few pensioners are requesting this. At tax year-end they would end up having a tax liability that not many of them would have budgeted for. SARS’s concern is that this results in an increase to the value of the outstanding book debt.

In response to this, the recently introduced legislation makes provision for SARS to determine the effective rate of tax in respect of the combined employment and / or pension income of the taxpayer (with reference to the latest data available to SARS), and to provide the retirement fund administrators with that rate for the purposes of withholding PAYE. SARS has introduced this service with effect from the 1st March 2022.

In practice, this new process works as follows:

  1. SARS will, where necessary, provide retirement fund administrators with the withholding percentage for the qualifying pensioners on the payroll.
  2. Retirement fund administrators will need to apply these percentages in the payroll as of the 1st March 2022.
  3. SARS will provide the PAYE withholding rates via e@syFile by way of an electronic file in CSV format.
  4. Should SARS not supply a PAYE withholding rate for a particular pensioner, retirement fund administrators must apply the normal PAYE withholding rates.
  5. Where SARS provides a PAYE withholding rate, it will be by way of an annual directive. Where a pensioner’s circumstances change (death or loss of income source), the retirement fund administrator must apply the normal PAYE withholding rates, as opposed to the rate supplied by SARS, from the month in which they become aware of the changes.
  6. Pensioners have the option of requesting the retirement fund administrator to withhold a rate higher than the rate provided by SARS. The excess PAYE must be reflected under code 3915 and the voluntary over-deduction code indicator must be set to ‘Y’.
  7. Pensioners may request that retirement fund administrators apply the normal PAYE, even if SARS has indicated a higher rate be deducted. In these cases, retirement fund administrators are obliged to inform the pensioner that the PAYE withheld may be insufficient to cover the tax liability on assessment.
  8. The rates of PAYE withholding provided by SARS apply to the following source codes only:
  9. 3603 – Pension
  10. 3610 – Annuity from a Retirement Annuity Fund
  11. 3611 – Purchased Annuity
  12. 3618 – Annuity from a Provident Fund or a Provident Preservation Fund

The implementation of this SARS process change has caused widespread confusion and unhappiness among pensioners. We have been inundated with queries from pensioners who either were not informed of the change or were shocked when they received a lower pension for the month. It’s clear that communication between SARS and the retirement funds have been poor, and this should not have been the case. Afterall, there was a period of nearly 4 months for all parties to communicate the process and the decisions that needed to be made – before the first pay run. What is certain is that SARS will continue to implement processes that improve revenue collection and limit the possibility of their debt book increasing.

If you’ve been affected by the new tax directive enhancements and have any questions, please contact [email protected].