By Hedley Lamarque, David Bass and Desiree Raghubir of BDO
Starting your first job and getting your first payslip is an exciting experience in anyone’s life. But what exactly does that payslip mean, and what should you do with the funds in your first salary?
Here are a few tips on payslips, your earnings and how to make the most of them.
A payslip is proof of a person’s work service for their employer. It holds a lot of weight with financial institutions, should you approach them for a loan.
Compulsory payslip deductions include tax and unemployment insurance (UIF). Deductions related to benefits like pension, medical aid, life cover and income protection are usually voluntary, but can be compulsory depending on your employer’s policy.
These are some terms you should be familiar with to understand your payslip…
CTC stands for Cost to Company, a term for an employee’s total salary package. It is your pre-tax salary and includes all benefits the company offers.
Gross pay is the amount you earn before deductions are taken off your salary.
Net pay is the amount you take home after deductions. This is what is paid into your bank account.
An IRP5 is the employee’s tax certificate. It is issued at the end of each tax year detailing all incomes, deductions and related taxes. You should use it to complete your annual income tax return.
PAYE is employees’ tax and stands for “Pay As You Earn”. Employers deduct PAYE from salaries monthly and pay it to SARS on employees’ behalf. The amount of PAYE you contribute is calculated from tax tables issued annually by SARS, the South African Revenue Service.
UIF is the Unemployment Insurance Fund, another deduction from your salary. As an employee, you pay 1% of your total salary and your employer pays another 1% of your salary to the fund every month. If you become unemployed after contributing to the UIF, or your company does not pay for your maternity leave, you can claim from the UIF.
Salary is one thing, but your earnings are what really adds to your personal wealth. Cost To Company (CTC) gives an idea of all your earnings and company benefits. This includes basic salary plus employer and employee contributions to retirement funds, group insurance, medical aid and other benefit funds.
CTC structures differ from one employer to the next, and many employers give you flexibility in structuring your package. It therefore makes sense to understand your benefits and package breakdown.
Because of how widely packages vary, you should avoid accepting a new job offer simply based on a higher CTC package. You may even end up with less net pay. Rather understand the benefits included in CTC.
Group benefits via your company are often less expensive than what you could negotiate in your personal capacity. It’s seldom worthwhile reducing your group benefits to take home a higher net pay, because you will probably end up paying a higher insurance, retirement or medical-aid costs as an individual.
Meet with your payroll administrator to gain a better understanding of your CTC package. Discuss the flexibility of restructuring your CTC package for tax efficiency, and understand each deduction so you can make every cent work for you.
Having got an understanding of your earnings, you can create a savings plan. Part of this is minimising the tax you pay.
Tax deductions should be used in full to get the maximum benefit. It is not illegal or socially immoral to claim back as much as you are legally allowed from SARS. Most accounting firms issue a tax handbook after the budget speech each year explaining the basics of earnings and what tax deductions are available.
One of the best investment strategies to invest and save for your future is to use the tax-free retirement deductions available from SARS.
It pays to start investing early to maximise the effect of compound interest. Start with small contributions to get into the habit of saving, and increase the contributions as your salary increases.
Invest as much as you can afford in a retirement fund to fully utilize the tax deductions available. You are entitled to deduct up to 27.5% of your taxable income or a maximum of R350 000 for contributions to retirement savings.
For monies that you do not want to tie up until age 55, consider opening a tax-free savings account. One can invest a maximum of R33 000 per annum, to a maximum of R500 000 in your lifetime, which means it will take just more than 16 years to reach the maximum.
Welcome to the world of work! It can be rewarding, empowering and lucrative – even more so when you understand your pay structure and how to make it work for you!
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