A lot has been said about the benefits of the new medical aid tax credit system – benefits to employees and our tax administration system in a whole. Not much has been said about the effect applying the new credits will have on the employers’ pockets.
Currently, medical aid capped amounts are allowed as a tax deduction prior to calculating PAYE. The tax deduction reduces the employee’s taxable remunderation and as a result, the employee’s PAYE liability is also reduced. The Skills Development Levy (SDL), payable by employers every month, is also calculated on the employee’s taxable remuneration. SARS expects employers to contribute 1% of the total taxable remuneration paid to employees, towards SDL.
SDL contributions are therefore calculated on the earnings after deducting medical aid capped amounts, reducing not only the employees’ PAYE liablilty but also the employer’s SDL expense.
From 01 March 2012, the medical aid caps will no longer be allowed as a tax deduction before calculating PAYE but will be replaced by medical aid tax credits. These credits are deducted after calculating PAYE. Eventhough employees will still receive some tax relief in the form of medical aid tax credits, employers will now have to budget for a higher SDL contribution as the taxable remuneration used to calculate the 1% contribution will no longer be reduced by a tax deduction for medical aid contributions.
The same increase will be noticeable in the UIF contributions made by and on behalf of employees aged 65 years and older. Although medical aid contributions made by older employees are fully tax deductible, SARS will require the portion contributed by the employer on behalf of the employee, to be included in their taxable remuneration as a fringe benefit. UIF is calculated on gross taxable remuneration, before allowing tax deductions. Including the medical aid contribution as a fringe benefit for employees 65 and older, will result in an increased UIF contribution for both the employee and employer.