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How do contributions affect taxable income?

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asked Nov 9, 2017 in BUS 4027W - Actuarial Risk Management by Rowan (3,390 points)

I saw this question in the ActEd notes: Why does legislation sometimes place limits on the level of contributions paid?
The answer is: Contributions may be subject to an upper limit because they are subject to advantageous tax treatment.
Does this mean that the more you contribute from your income towards the pension scheme, the less taxable income you have? This is assuming we don't get taxed on amounts that go towards the pension scheme.

1 Answer

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answered Nov 9, 2017 by jolegutko (540 points)

No, it means that the government is worried that people are going to abuse the tax break on contributions to avoid paying tax. Example: let's say I make R12 million a year (I would pay a lot of tax). I might want to contribute 50% of my salary to a retirement fund, since this means I avoid paying tax on this. I don't need that much pension - I am trying to avoid and delay paying tax. The government wants to support reasonable pensions savings, but not delay too much of its income tax.