Thinking Your Two-Pot Tax Was Settled? SARS May Say Otherwise

South Africans who accessed their retirement savings through the Two-Pot Retirement System may face an unexpected tax surprise when submitting their annual income tax returns.

Although tax is deducted when the withdrawal is paid out, the amount withdrawn from the savings component is still treated as taxable income for the relevant tax year. In practical terms, SARS adds the withdrawal to your other income when calculating your final annual tax liability.

This means that the tax withheld at the time of withdrawal may not always be enough. Depending on your total income, deductions and personal circumstances, the withdrawal could increase your marginal tax rate or result in an additional amount payable on assessment.

Why Additional Tax May Be Payable

Withdrawals from the savings component of the Two-Pot Retirement System must be reflected in your annual tax return. Your retirement fund administrator should issue an IRP5 or IT3(a) certificate showing the withdrawal amount, the tax directive number and the tax already deducted.

Taxpayers should check that the withdrawal appears correctly on their tax certificate, generally under source code 3926. If you have not received the relevant certificate, contact your fund administrator before filing your return.

The important point is that a Two-Pot withdrawal is not simply a separate tax event that is “done and dusted” once the money is paid. It is brought into account with your other taxable income for the year.

Understanding the Tax Bracket Impact

Many taxpayers assume that because tax was deducted upfront, there can be no further tax consequence. Unfortunately, that is not always the case.

If the withdrawal increases your total taxable income enough to place part of your income in a higher marginal tax bracket, the tax deducted under the directive may not fully cover your final annual tax liability.

This does not mean every taxpayer who made a withdrawal will owe SARS more money. The outcome depends on your full tax picture, including your salary or business income, deductions, rebates and any other taxable income earned during the year.