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How to avoid tax debt

"In this world, nothing can be said to be certain except death and taxes".

Benjamin Franklin’s quote still rings true today. Taxes are a reality, and failing to pay them could land you in tax debt, or worse, in hot water with the law. Let’s figure out how to avoid tax debt. 

In South Africa, taxpayers are required to be tax compliant by submitting tax returns and payments on time. Not paying your taxes is considered a criminal offence, and if you don’t pay your taxes, the South African Revenue Service (SARS) can collect the debt in various ways, including removing it directly from your bank account with a garnishee order. More serious penalties can see your assets being attached and sold, and your name blacklisted. 

Here’s everything you should know about tax in South Africa, and how to avoid getting into tax debt:

How to avoid tax debt

Who must pay tax?

Every earner must pay tax, but not everyone is required to submit a tax return. If you earn under R350 000 for a full year from one employer (total salary income before tax) and have no other sources of additional income, and no deductions that you want to claim (for example medical expenses, travel or retirement annuities), then you don’t need to submit a return.

How much tax should you be paying?

These are the 2020 tax tables, based on your annual income:

Taxable income (R)Rates of tax (R)
0 – 195 85018% of taxable income
195 851 – 305 85035 253 + 26% of taxable income above 195 850
305 851 – 423 30063 853 + 31% of taxable income above 305 850
423 301 – 555 600100 263 + 36% of taxable income above 423 300
555 601 – 708 310147 891 + 39% of taxable income above 555 600
708 311 – 1 500 000207 448 + 41% of taxable income above 708 310
1 500 001 and above532 041 + 45% of taxable income above 1 500 000

What is tax debt?

It’s easier to get into tax debt than you might think. Even if you’re submitting your tax returns on time, if you are underpaying tax, SARS will penalise you. This could happen if, for example, you have more than one income and you are paying tax for each according to the tax tables. However, SARS will not assess your various incomes individually – they add up your total income for assessment, which could place you in a higher tax bracket without realising you are underpaying. 

If SARS has found that you have underpaid tax during the year, you will be required to pay the outstanding amount (typically in one lump sum). Many people don’t have the required amount on hand, and so avoid paying the tax altogether. Unfortunately, your debt will continue to earn interest, and the amount you owe will only increase the longer you avoid paying it. 

Do you owe SARS money that you can’t afford to pay?

If you are not tax compliant, and you owe money to SARS, there are circumstances in which you can reach an agreement to defer your tax debt or pay it back in instalments. You will need to discuss your financial position openly with SARS. However, SARS reserves the right to decline the request, and interest will continue to accrue on your unpaid debt.

What are some of the ways to pay less tax, to ultimately reduce any tax debt you may incur?

1. Contribute towards a retirement fund

Your contributions towards retirement funds are tax-deductible.

2. Open up a tax-free savings account

You can save up to R33 000 in a tax-free savings account annually, and all the interest, dividends and capital gains earned, will be tax-free in your hands.

3. Join a medical aid scheme

If you contribute to a medical aid, you will receive a fixed monthly tax credit – a flat rate per month (i.e. doesn’t take your taxable income into consideration) and is a direct reduction of your tax liability.

Avoiding tax debt is all part of your financial wellbeing. If you need help with the health of your finances, contact us.