Picture: 123RF./LE MOAL OLIVIER
Picture: 123RF./LE MOAL OLIVIER

Many taxpayers who earn an income from more than one source - including widows who receive a spousal pension and taxpayers who change jobs during the tax year - face a nasty surprise when they submit their tax returns because they have paid too little tax during the year.

This can be as a result of the rebate being applied by each employer or pension provider, or the aggregation of income pushing the taxpayer into a higher tax bracket.

The problem worries the government to such an extent that the Treasury plans to test some proposals to address the issue during the coming year.

Chris Axelson, the chief director of economic tax analysis at the Treasury, says many widows of government employees find that when their tax returns are assessed they owe unmanageable amounts of tax as a result of too little pay-as-you-earn tax being deducted from their monthly pensions and other income.

The Income Tax Act was amended to allow annuity (pension) providers and employers not to deduct the primary rebate from one of a taxpayer's multiple sources of income, but few taxpayers are asking their financial institutions or employers to make use of this provision to avoid a big tax liability on assessment.

The Treasury wants to test its proposals for the surviving spouses of members of retirement funds through the year.

In the Budget Review, the Treasury proposes that: retirement funds provide
effective communication to surviving spouses relating to tax and financial issues; the monthly spousal pension be subject to PAYE withholding at a specified tax rate; and tax rebates should not be taken into account in the calculation of tax on spousal pensions.

The Budget Review notes that if, as a pensioner, you pay PAYE in excess of what is due as a result of these proposals, you will be refunded when your tax is assessed by Sars.

Marc Sevitz, chief financial officer and tax director at TaxTim, says that many other taxpayers also face paying in on assessment for a tax shortfall because they receive an income from more than one source.

Retirees who receive pensions from annuities bought from a retirement annuity as well as from a pension fund, or multiple pensions bought from multiple RAs, may find themselves in the same boat.

And if you change jobs during the tax year you may have to fork out additional tax at the end of the tax year when you are assessed because both your former employer and your new employer will apply the tax rebate to the income you earn in that year.

In a blog on TaxTim's site, Sevitz says you need to remember that the rate of tax you pay is based on a "sliding scale", which results in the tax increasing as your taxable income increases. "The more you earn, the more you pay," he says.

If you have multiple employers or multiple pension payments, each of your employers or pension providers may be deducting "the correct" amount of tax from the salary or pension they pay you.

However, they do not take your entire income into consideration when applying the tax rates based on the tax tables. When two or more sources of income are added together, this may push you into a higher tax bracket, which results in your owing additional tax to Sars.

Denver Keswell, a senior legal adviser at Nedgroup Investments, says if a surviving spouse is over the age of 65, he or she may be paid a pension of, for example, R10,000 a month and not have any tax deducted because the tax threshold (the amount you can earn without paying any tax) for those over the age of 65 will be R122,300 a year from the beginning of March.

If that pensioner is also earning an income from, for example, a living annuity that is also below the threshold, the annuity provider may also deduct no tax during the year, but when the income is combined on assessment, the person will fall into a tax bracket where tax applies and find themselves with a large liability.

Keswell says a flat income tax rate for a spouse's pension could make the system fairer but the proposal would have to provide for the pensioner, whose total earnings are below the tax threshold, not to pay more than he or she should.

Lisa Griffiths, associate director at BDO Wealth Advisors, says though the Treasury's proposals have good intentions, she is concerned that one set of problems may be swapped for another - such as trying to obtain your refund from Sars.

She says she lauds the proposal to provide surviving spouses with effective communication regarding tax and financial issues, but in practice many pension funds are already communicating on these issues to pensioners and annuitants.

"There is already a procedure to voluntarily adjust your PAYE to a set percentage. Each person's financial situation is so different that it is difficult for me to see how a universal ruling on the PAYE deduction will solve any problems.

"The withholding taxes will continue to be inaccurate," she says.

Keswell is of the view that funds communicate a lot about products but could do more to inform retirees about tax and financial planning.

In the meantime, if you are earning from multiple sources, or receiving a pension and income, or have changed jobs, get help with the tax calculation and provide for the nasty tax surprise that may be ahead.

If you cannot pay the tax you owe when you are assessed, you can pay it off but your debt will incur interest at the official interest rate, currently at 7.7% a year.