As the tax year draws to a close, a worrying trend is emerging among South African savers.
New data from Taxtime has revealed that while almost half of its users have taken the commendable step of opening tax-free savings accounts (TFSAs), many are leaving significant sums unused.
The average contribution during the tax year is just R14,171, a staggering R21,829 less than the R36,000 annual allowance that ended on 28 February.
This discrepancy represents not only a missed opportunity for individual savers, but also the loss of millions of rands in potential tax savings across the country.
“Many South Africans who file taxes with us show commendable saving and planning behavior but are unknowingly leaving significant money on the table,” said Daniel Swigers, Taxtime director.
“These individuals have opened TFSAs, yet their contributions are well below the limits, which means they are not securing the full tax benefits available to them,” he said.
For South African savers, it is important to understand the long-term value of maxing out a TFSA.
Unlike standard savings or investment accounts, where SARS taxes growth, whether through interest, dividends or capital gains, the TFSA allows tax-free growth.
This means that every rand earned remains untouched, which is a compelling reason to favor these accounts.
Swigers shared the example of Thandi, who invests R500,000 at an 8% interest rate.
In a traditional account, she would pay R4,212 in tax annually on her R40,000 interest, leaving her with R35,788.
However, in the TFSA, she keeps the entire R40,000, with an additional R4,000 to reinvest or save each year.
Over the decades, that modest annual tax savings has grown significantly.
If Thandi keeps her investments at that growth rate for 35 years, her TFSA will grow to almost R7.4 million, while the tax account only has R5.6 million, representing a staggering difference of R1.8 million.
While the prospect of a few thousand rands may seem trivial in the short term, the cumulative effect of taxes over a lifetime of savings can quietly destroy potential wealth.
Why are responsible savers failing to make full use of these tax benefits?
Taxtime's findings suggested several contributing factors.
Understandably, many South Africans face financial constraints and may not see maxing out their TFSA as a priority.
Others may not realize the contribution limits reset at the end of February, causing unused allowances to go to zero.
Additionally, some people may be forgoing the compounding benefits that come with growth-oriented investments and keeping their investments in low-return cash accounts.
Unless individuals understand the urgency of that R36,000 limit, they risk losing the chance of it growing completely tax-free over time, leading to a potential loss of more than R218,000 after ten years.
South African taxpayers will find the strict rules governing TFSAs reflect the substantial tax benefits they offer.
Contributors can deposit up to R36,000 annually into their TFSA, with an absolute lifetime limit of R500,000. Tread carefully: exceeding these limits attracts a 40% penalty from SARS on the excess amount.
Additionally, withdrawals of amounts such as R10,000 are deducted from the lifetime allowance, and as the clock strikes midnight on 28 February, any unused allowance is lost forever. This represents one of the rare 'use it or lose it' scenarios in the South African tax landscape.
For those who want to avoid leaving money on the table as this tax year approaches, TaxTime provides an invaluable resource.
The platform not only highlights how to maximize tax-free savings opportunities, but also helps users navigate contribution limits and deadlines as well as formulate effective tax planning strategies. Visit www.taxtim.com for clear guidance as the deadline approaches.
personal Finance