Today, it’s not uncommon for people to have multiple income streams; freelancing in addition to permanent employment can be crucial to survive. If the pandemic has taught us anything, it’s that having an emergency fund is vital to safeguard us against unforeseen events. You may also be drawing annuity income from a product such as a life annuity. There are specific tax implications for having multiple streams of income, and if not fully understood (and budgeted for), you’re likely to be hit by a hefty bill from the South African Revenue Service (SARS).

 

Drawing an income from an employer salary and an annuity

Imagine that you earn a salary from your employer and draw an annuity income from a product such as a life annuity. In this case, both the employer and the life insurance company (the life annuity service provider) will deduct Pay-As-You-Earn (PAYE) tax from the income you’ve earned and pay it to the South African Revenue Service (SARS)

 

  • Brief recap: Retirement annuities and life annuities

You can only access the funds from a retirement annuity when you reach 55 years of age. One-third of those funds can be drawn tax-free up to R500,000 over your lifetime. The remaining two-thirds need to be moved into another savings product, such as a life annuity. If you draw an income from the funds in the life annuity, you will pay tax on each withdrawal.

  • The problem

The employer and the life insurance company might only see the income that they provide to you. This means that they both apply the annual tax rebates when estimating your tax liability. These rebates should only be used once and, in this case, could potentially be applied twice.

Furthermore, they use an incorrect tax rate, e.g., too low a tax rate because the other stream of income isn’t accounted for, and the combined income could potentially push you into a higher tax bracket.

Ideally, the tax assessment should show that you have a tax liability that surpasses the tax already withheld by their employer and the life insurance company during the assessment year. However, in this case, your tax calculation will be inaccurate.

  • The result

Your employer and life annuity service provider are likely to owe money to SARS because the evaluation revealed a tax debt. Because according to South African tax law, you need to pay income tax on any local and international taxable income. These amounts are combined to determine the total tax liability.

 

How can this be fixed?

To assist taxpayers from falling into this situation, the Income Tax Act permits you to make additional voluntary tax payments. Speak to a business consultancy that has access to independent financial advisers and tax professionals. They can provide you with all the information and processes you need to arrange for a voluntary additional PAYE deduction or make provisional tax payments to SARS. (This takes place twice a year, February and August for an individual).

The recommended way to manage this: identify your total tax liability, meaning you must account for your multiple sources of income. Once you know the total amount, the correct tax rate can be calculated.

It would be beneficial to ask your annuity provider to apply a higher marginal tax rate to your annuity income. Implementing this usually allows them to withhold more PAYE from your income during the tax year. This will play a significant role in assisting you to avoid unforeseen tax bills when you file your tax return with SARS.

 

Freelancing in addition to permanent employment

If you have a permanent job and choose to also do some freelance work on the side, the income you make from the freelance work needs to be submitted as additional income and is usually taxed at 25% when you file your tax return. So, it’s very likely that you’ll end up paying SARS money instead of receiving a refund. However, tax-deductible contributions made to products such as a medical aid scheme and/or investment products can soften the blow.

The adage, knowledge is power, is appropriate. Knowing how income tax works and calculated are vital. In addition, by understanding tax, you can mitigate potential financial issues by

  • Budgeting for the likelihood of having to pay the tax due to multiple income streams. E.g. Every time you receive money from a freelance project, put 25% of the total in a readily accessible savings account such as a Money Market to have funds available to pay SARS.
  • If the company offers to make the necessary tax deductions themselves, accept the offer.
  • Speak to a business consultancy with access to expert independent financial advisers and tax professionals who can assess your tax situation and provide you with the guidance you require.
 

In conclusion, if you earn multiple streams of income from a permanent job and a life annuity or freelance work, you must include it on your tax submission; you must know how to rectify any potential financial issues that may occur.