Good news for employees countrywide is that the new medical aid tax credit system, which replaced the capping system from the beginning of March this year, will ensure that they all receive equal benefits.
“The greatest benefit goes to employees whose earnings fall within the lower-income brackets because the medical aid capped amounts, deducted before calculating PAYE, were subject to the marginal income tax rate of each employee. Now the tax credit is applied after calculating PAYE,” says Grant Lloyd, managing director of payroll and HR software specialist Softline Pastel Payroll, part of the Softline and Sage Group.
Lloyd gives two examples to illustrate how the medical aid tax credit helps employees:
John earns R10 000 a month and contributes R1 000 towards his medical aid. He is 27-years-old, single, with no children. With the old capping system, John would qualify for a R720 medical aid cap applied as a deduction against his salary of R10 000, so his PAYE would be calculated on R9 280.
His total annual remuneration value placed him in the lowest earnings bracket, meaning his marginal tax rate was 18%. He would have received 18% of his R720 medical aid cap, a reduction of just R130 in his PAYE because of his medical aid contribution. But with the new tax credit system that is now in place, John's PAYE reduction will amount to R230, putting an additional R100 in his pocket every month.
Mary earns R25 000 per month and contributes R1 000 towards her medical aid. She is 25-years-old, single, with no children. Under the old capping system, she qualified for a R720 medical aid cap, which meant her PAYE was calculated on R24 280. Her total annual remuneration was subject to a marginal tax rate of 30%, resulting in a PAYE reduction of R216, which is 30% of the R720 medical aid cap.
“These examples show how the old medical aid capping system can be considered unfair,” says Lloyd. “Although both John and Mary contributed the same amount towards their respective medical aids, Mary enjoyed a greater benefit because her earnings were higher.
“With the tax credit system having taken effect from 1 March 2012, both John and Mary will receive the same reduction of R230 in their PAYE liability, regardless of their earnings, which is a more equitable situation.”
Lloyd emphasises that companies need to ensure they apply the new medical aid tax credit calculations on all payslips processed from the beginning of March this year. “Those using automated payroll solutions should already have the parameters and calculations that apply to the medical aid tax credit in their systems.”
Attend the 2012/13 Medical Aid Seminar, hosted by Softline Pastel, and find out how the new Medical Aid Tax Credit method will affect your payroll. To read more, go to http://www.pastelpayroll.co.za/Pastel-Payroll-Software-Training/Seminars/Medical-Aid-Seminar.asp.
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Pastel Payroll
Pastel Payroll, part of Softline and The Sage Group, is one of the leading developers of payroll and HR software solutions and services in South Africa as well as the rest of the African continent. Skills, experience and innovation in this field accumulated over many years in business confirm Pastel Payroll's leading position in the SME market. Pastel Payroll & HR provides a wide range of software solutions from start-up to medium-sized as well as larger enterprises. It offers easy-to-use, feature-rich and flexible payroll and HR software solutions to ensure businesses are kept up to date and fully compliant with changing legislative requirements - our software does it all for you. www.pastelpayroll.co.za
Softline
Softline is a leading provider of business software and related services. Founded in 1988 by Ivan Epstein, Alan Osrin and Steven Cohen, Softline was established during the formative years of the business software industry. While Softline's heritage is in the SME market, the group also offers expertise and solutions that meet the needs of specific industries and larger organisations. In 2003, Softline was acquired by The Sage Group, a FTSE 100 company. Softline has a solid track record offering customers local expertise backed by the global Sage brand. The group delivers quality software solutions to make customers' business lives easier.
The Sage Group
The Sage Group is a leading global supplier of business management software and related products and services, principally for small to medium-sized enterprises. Formed in 1981, Sage was floated on the London Stock Exchange in 1989. Sage has more than six million customers and more than 13 500 employees worldwide. It operates in over 24 countries covering the UK, Europe, North America, South Africa, Australia, India and China. For further information, please visit www.sage.com.
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