Budget update on medical scheme tax credits

2014-03-03 14:25
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Johannesburg - In his National Budget, delivered last week, Finance Minister Pravin Gordhan also addressed tax credits for medical scheme contributions.

Effective from March 1 2012, the medical aid capping system was replaced with a tax credit.

This brought in equality for all taxpayers under the age of 65 and improved benefits for lower earners.

In the new tax year, which commenced on March 1 2014, monthly tax credits for medical scheme contributions (reduction of tax payable) have been marginally increased from:

- R242 to R257 for the main member and the first dependent on a medical scheme;

- R162 to R172 for each additional beneficiary on the medical scheme.

The medical aid tax credit system allows a reduction on income tax and does not reduce taxable earnings as the medical aid deduction system allowed in the past.

"The credit system is a more fair approach to providing tax relief, as each individual contributing towards a medical aid fund will receive equal relief as it is not based on annual earnings," said Madelein van der Watt, development manager at Sage Pastel Payroll & HR.

Whether an individual earns R250 000 per annum or R2 500 000 per annum, the income tax liability will be reduced by R257 for each of these individuals with at least a single beneficiary on the medical aid fund.

People older than 65

From the 2014/15 tax year, medical aid contributions by people older than 65 will also be subject to the medical aid tax credit system.

Up until now, those contributions were fully tax deductible. Effective from March 1 2014, their contributions will also be subject to the medical aid tax credit system.

Is it a fringe benefit?

The company contribution towards an employee’s medical aid yields a taxable fringe benefit.

"Generally, any payment made by an employer on an employee’s behalf, must be included in an individual’s taxable remuneration, before calculating the final Paye deduction," said Van der Watt.

Only pension and provident fund contributions are still exempt from the rule until 1 March 2015.

"Regardless of an employee’s age or employment contract conditions, the medical aid contributed by an employer, whether in cash or as a package component directly to the fund, must be treated as a taxable fringe benefit," said Van der Watt. 

"The contribution paid by the employer will be subject to employee’s tax and contrary to popular belief, there is no way to structure a salary package to bypass the fringe benefit."

During the 2012/13 year of assessment, 76% of all fringe benefits reported on tax certificates were medical aid contributions made by employers on behalf of their employees.

Tax certificate

Medical aid contributions must be reported on the employee’s tax certificate.

As part of the employer filing season, each company is responsible to issue their respective employees with a tax certificate.

Medical aid contributions, both the employee and employer contributions must reflect on the employees tax certificate (IRP5/IT3A).


Jim Hardens is 67 years old, he earns a basic salary of R15 000 per month and the company contributes the full medical aid contribution of R1 000 on his behalf.

He is the only member on his medical aid.

Below, please see how the calculation differs for tax year 2013/14 and 2014/15.

Seeing that Jim is over 65 years, he also needs to be taxed on the medical tax credit system, effective March 1 2014.

Jim will enjoy a tax saving of R143.04 in the new tax year. (See below)

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