Employees will now benefit equally from the new medical aid tax credit system that replaces the current capping system, effective 01 March 2012.
The benefit is mostly to employees whose earnings will fall within the lower income brackets as the medical aid capped amounts, deducted before calculating PAYE, were subject to the marginal income tax rate of an employee while the tax credit is applied after calculating PAYE.
Let’s make use of an example to illustrate how the medical aid tax credit brings equality to the income tax system.
John earns R10 000 per month and contributes R1000 towards his medical aid. John is 27 years old, single with no children.
Currently, John will qualify for a R720 medical aid cap that is applied as a deduction against his salary of R10 000, which means his PAYE will be calculated on R9280. John’s total annual remuneration value puts him in the lowest earnings bracket which means his marginal tax rate is 18%. John will receive only 18% of his R720 medical aid cap as a reduction in his PAYE, therefore his PAYE will be reduced by R130 because of his medical aid contribution. On the new tax credit system, John will enjoy a R230 reduction in his PAYE – this means an additional R100 in his pocket each month!
Mary earns R25 000 per month and contributes R1000 towards her medical aid. She is 25 years old, single with no children.
Mary qualifies for a R720 medical aid cap which means her PAYE will be calculated on R24 280. Her total annual remunaration will be subject to a marginal tax rate of 30% which means Mary’s PAYE will be reduced by R216 because of her medical aid contribution. She receives 30% of the R720 medical aid cap as a reduction in PAYE.
You can see how the current medical aid capping system can be seen as unfair – although both John and Mary contribute the same amount towards their respective medical aids, Mary enjoys a greater benefit because her earnings are higher. From 01 March 2012, they will both receive the same reduction of R230 in their PAYE liability, regardless of their earnings.
Remember to apply the new Medical Aid Tax Credit calculation on the first payslips you process for March 2012.