By: Mignon du Preez, Marketing, Public Affairs and Sustainability Executive, Old Mutual

The dawn of 2023 came with numerous amendments to tax legislation which was promulgated on 29 December 2022 and came into effect on 1 January 2023. For instance, the Income Tax Act amendments resulted in the tax-deductible amount for contributions towards both retirement and educational policies being increased from N$40 000 to N$150 000 per annum.

The benefit this will have for insured clients is that a tax deduction reduces your overall taxable income and effects the amount of tax you pay. By increasing this amount to N$150 000 per annum, you could effectively decrease your taxable income which means that you will pay less tax.

An example on how you can save with the recent changes:  

Assumptions
Monthly Salary:N$50 000
Annual Salary:N$600 000
Annual Contribution:N$40 000

To highlight the changes, below is a breakdown of the changes that will come into effect:

Previous Tax LawNew Tax Law
N$600 000 – N$ 40 000 = N$560 000 (taxable income)N$600 000 – N$ 150 000 = N$450 000 (taxable income)
Pre-set calculation as per Namibian tax table for income of N$ 600 000:N$115 000 + (30% for each N$ above N$500 000)Pre-set calculation as per Namibian tax table for specified income of N$ 600 000:N$115 000 + (30% for each N$ above N$500 000)
N$115 000 + (30% of N$60 000)=N$133 000 per annum=N$115 000 per annum 

Thus, in terms of the above scenario, the saving will be N$18 000 a year on tax each year if you commit to the full tax benefit you are offered on a salary of N$600 000.

Impact of the Tax Amendments on Retirement Annuities

A Retirement Annuity, also known as a RA, is a tax-effective retirement investment that is designed for individuals who want to save towards their retirement. Once you reach retirement age, which is from the age of 55, one-third of the RA is paid to you tax free as a lump sum and the remaining two-thirds of the RA is used to pay you a monthly taxable income.

A retirement annuity is the perfect retirement savings vehicle if you are self-employed or can also assist as a top-up to your employers’ Pension or Provident Fund.

Often people ask when they should start saving for retirement.My answer to this is always, the best time to start saving for retirement was 20 years ago. The second-best time is now. For instance, if you save N$1000 towards your retirement in 2043 (20 years) and you start today, you will save N$1 235 258. If you delay by one year, you will save N$1 075 108. And if you delay by three years, you will save just N$807 000. So, a delay by just three years will cost you N$428 258!

(*Assumption: Growth rate of 8%, yearly contribution increases of 10%)

Assumptions
Salary:N$25 000
Annual Salary:N$300 000
Monthly Contribution:N$1 000
Annual Contribution:N$12 000
Tax Rate:25%

With a monthly RA contribution, you can save N$3 000 a year on tax.

With a monthly RA contributionWithout a monthly RA contribution
N$300 000 – N$ 12 000 = N$288 000 (taxable income)N$ 300 000 (Taxable Income) 
Pre-set calculation as per Namibian tax table for income of N$ 300 000:N$9000 + (25% on amounts above N$100 001 and less than N$300 000) Pre-set calculation as per Namibian tax table for income of N$ 300 000:N$9000 + (25% on amounts above N$100 001 and less than N$300 000) 
N$9000 + (25% of N$187 999)=N$55 999.75 N$9000 + (25% of N$199 999)=N$58 999.75 

Tax Change Effects on Education Plans

A key role of being a parent is to nurture and provide for our children’s needs and to teach them how to do things for themselves. One way that you can do this is by providing quality education that opens career opportunities and increase their future earning potential.

By investing in an Education Policy, you can ensure that your children will have funds available for their studies. Study policies also qualify as being tax deductible. Investing some funds every month towards your children’s education can have a significant impact in their lives.

By investing as little as N$500 a month for 10 years, you can save up to N$92 862.92. This money can then be used to ensure your child has access to a quality tertiary education, without the added financial burden.

(*Invested in a Fund with a return of 8% per annum)

Here are five tips to help you save for your children:

1)              Give them the gift that grows – Instead of giving your children expensive gifts, opt to give them smaller presents and top up their education savings or other investments.

2)              Teach them the value of time – Encourage your children to save a portion of all the money they receive to save towards a goal. They will know first-hand how staying consistent for a period can add up to a lot.

3)              Chat to your older children about their tuition options – Good academic performances could qualify your child for a bursary or even a full scholarship. This would ease the financial burden on both of you.

4)              Set a notable example – One of the most important lessons a child can learn is how to manage money in a sensible way. Use your household budget as an example to show how to balance your income with your monthly expenses, savings, and investments.

5)              Get guidance – Enlist the help of an accredited Financial Adviser or Broker to draw up a financial plan and recommend solutions that will aid in your effort to reach you and your family’s financial goals.

Assumptions
Salary:N$25 000
Annual Salary:N$300 000
Monthly Contribution:N$1 000
Annual Contribution:N$12 000
Tax Rate:25%

With a monthly Education Policy contribution, you can save N$3 000 a year on tax.