The South African Revenue Service (SARS) has a very similar tax system to the UK, although there are subtle differences which need to be understood by all Expats who are residing there. Over 215,000 British expatriates are living in South Africa hence, it is important to understand how pensions are taxed, as this could significantly change the amount of tax that you have to pay. The South African tax legislation changes annually; we, therefore, update our records regularly to ensure the information we provide for Expats is applicable today. The areas we will cover include:
- Defining a South African Resident.
- South African Tax Position for Residents.
- South African Tax Rebates.
- South African Tax Thresholds.
- South African tax position for non-residents.
- Capital Gains Tax.
- Investment Income Tax
- Rental Income Tax
- Donation Tax (Gift Tax)
- Estate Duty (Inheritance Tax)
- Corporation tax.
- How Pensions Are Taxed in South Africa.
- UK Pensions.
- Transferring to a SIPP for South African Residents.
It is important to note that the information provided on this website is just a guide hence before making any decisions it is always advisable to a specialist tax adviser.
Defining a South African Resident
It is important to note that the South African tax year runs from 1st March to 29 February.
A resident in South Africa can be determined as an ‘ordinary resident’ or a ‘physical present resident’ depending on the following:
- Ordinary Resident – is determined by the country in which a person would return to after their wanderings i.e. where they would consider being home. This is usually South Africans, although it can apply to British Expats as well.
- Physical Present Resident – If an individual is not considered ‘ordinary residence’ then it is necessary to consider whether the individual is deemed as a resident for tax purposes by undergoing the ‘physical presence test’. To be deemed a physically present resident, the individual must meet all 3 of the following criteria:
- Spend more than 91 days in South Africa in the given tax year.
- Spend more than 91 days in total during any of the 5 previous years.
- Spent more than 915 days in total during the 5 previous years.
South African Tax Position for Residents
South African residents pay income tax on their worldwide income. The tax system works very similar to that of the UK whereby the employer withholds tax from your wages via PAYE. Residents need to file a tax return at the end of each year. The date is publicized to encourage people to meet the deadline, although it has been criticized as confusing for many people. It is important to note that the income tax bands regularly change in South Africa hence we update our files to make sure you receive the most up to date information.
2018 income tax bands are as follows for annual earnings between:
|0 – R189,880
|R189,881 – R296,540
|R296,541 – R410,460
|R410,461 – R555,600
|R555,601 – R708,310
|R708,311 – R1,500,000
It is important to note that if you are earning significant amounts of income outside of your employment income, you may have to pay provisional taxes three times a year.
South African Tax Rebates
When calculating your final tax liability, it is important to deduct the following 2015-16 rebates depending on the sector you work in:
South African Tax Thresholds
South Africa has certain tax thresholds, meaning if you earn less than the threshold amounts, you pay no tax depending on your age. The tax thresholds for 2015-16 are as follows:
|65 and older
|75 and older
South African Tax Position for Non-Residents
Non-residents in South Africa are only subject to tax arising in South Africa, not on worldwide assets. Non-residents are also taxed on immovable property inside of South Africa as well as assets which are permanently situated in South Africa i.e. a business.
Unlike many countries, South African non-residents pay the same rates of income tax as residents. Non-residents must also complete a tax return on South African sourced income if over the tax threshold.
Capital Gains Tax (CGT)
Capital gains tax is taxed as ordinary income in South Africa, although certain tax relief applies. No capital gains tax is applicable where the gain is less than R30,000 in any given year and only 66.6% of the gain is taxable.
Principle residence is also taxed if the gain is over R2m.
Investment Income Tax
Investment income is any income that is derived from a bank account, savings account, government bond or corporate bond. Investment income is taxed as ordinary income at the individual’s marginal rate, although certain tax relief applies. If you are under 65, you won’t pay tax on South African sourced investment income if the income is less than R23,800. Interest from South African sourced income is exempt from tax if earnings are less than R34,500.
Non-residents will be liable to pay tax on investments if they are in South Africa more than 183 days in the given year. This is subject to a 15% withholding tax.
Rental Income Tax
Taxed as ordinary income for residents and non-residents.
Dividends from South African sources are exempt from tax. Dividends from non-south African sources will be taxed as ordinary income, although certain tax relief is granted. Only 37.5% of the amount is taxable. You are also entitled to any withholding tax charged by the country of origin.
Non-residents pay 15% withholding tax as with ‘investment income.
Donations Tax (Gift Tax)
Donations are taxed at 20% on the disposal of the property. The first R100,000 donations each year is exempt from donations tax. Donations between spouses are exempt as well as donations of property outside of South Africa so long as the donor received the donation before becoming a resident.
Estate Duty (Inheritance Tax)
Estate duty is taxed at 20% for anyone with who has a net estate over R3.5m.
Corporation tax is progressive in South Africa. The 2015-16 corporation tax bands are as follows:
|0 – R70,700
|R70,700 – R365,000
|R365,000 – R550,000
Turnover tax may apply to business with a turnover of less than R1m which is banded up to a tax rate of 6%.
Capital gains are tax at normal rates, however, only 66.6% is taxable making the above rates a lot less.
How Pensions are taxed in South Africa
There exists a DTA between South Africa and the UK. This means that pensions paid ‘in consideration of past employment’, including annuities, are taxed according to South African tax laws for tax residents with UK pensions. The maximum rate of income tax in South Africa is 40%. Government pensions are treated a little differently.
Some pension income may be assessed as taxable in the UK instead. This applies where the income is not paid ‘in consideration of past employment’. In this case, it is treated as ‘Other Income’ not ‘Pension Income’. This results in the UK being the default tax jurisdiction. We recommend that reliable and bespoke international pension advice be sought in the case of South Africa.
Residents in South Africa are subject to tax (up to 40%) on their total income no matter the source-country. Foreign pensions are exempt from this. Any UK pension, as long as it was not ‘received or accrued’ from or in South Africa, and is ‘in consideration of past employment’ elsewhere, is exempt from income tax. This specifically excludes anyone whose pension has arisen from time in public office in South Africa.
For residents of South Africa, therefore, any foreign pension income is tax-free with the exclusion of those whose pension has benefitted from their position in public office in the country.
Transferring to a SIPP for South Africa Residents
South African residents have the option to leave their pension in the UK, transfer to a SIPP, transfer it to a South African Retirement Annuity fund QROPS or move it to a QROPS in a tax neutral jurisdiction such as Malta and Gibraltar.
Due to recent legislation changes, QROPS is no longer a suitable solution to many expats with UK pensions as there will now be a 25% transfer charge to anyone who transfers to a QROPS in South Africa if the QROPS is based outside of the jurisdiction.
SIPP’s have since become the most favourable solution for the following reasons:
- Your funds will grow tax-free with no UK inheritance tax.
- You will be able to take a 25% lump sum.
- You can choose to have your funds invested in GBP, EUR or any major global currency.
- You have a much greater investment choice.
- UK pension death tax may not apply depending on the age you die.
- Many more
If you are considering transferring your UK pension to a SIPP and you want free impartial advice before making a decision, speak to one of our independent financial advisers.
*Please note: The information provided is general information on the basis of our understanding of the current South African tax legislation as of May 2018. Should any of the information be inaccurate or misleading, we take no responsibility for any reliance placed on it. We recommend that individuals always seek specialist advice before making any decisions.