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What to do with your 13th cheque?

Dec 23 2019 15:54
Carin Smith

The South African Payroll Association (SAPA) has been inundated with queries regarding their expected annual bonuses in December.

Jethro Malapane, a member of the executive committee of SAPA, says many of the enquiries stem from employees who don't know if the "extra payment" constitutes a thirteenth cheque or a performance bonus.

"A thirteenth cheque is essentially an additional monthly salary paid, or 8.33% of the employee's annual salary, that gets paid to the employee, normally in December or any other month depending on the employer's contract," explains Malapane.

A performance bonus, however, is based on an employee's individual performance and it is subject to the employer's conditions as stipulated in the employment contract.

A bonus amount becomes part of an employee's total taxable income for the year, which may impact the tax bracket and tax provisions that should be made.

Malapane says that if your contract stipulates that you will receive a thirteenth cheque, then monthly contributions can be made as part of your salary deductions to offset the tax implications of the bonus.

Malapane suggests speaking with the payroll department to adjust your monthly contributions so that you contribute towards tax each month. Doing this allows you to enjoy your bonus in full in December.

When it comes to how you should apply your 13th cheque (if indeed you get one at the end of the year), it is simply a matter of prioritising and adding in time, according to Mark Hawes, a financial planning consultant at Alexander Forbes.

He provides an idea of how you can both enjoy the fruits of your labour, reduce the pressure on your income in the coming months as well as create a base for actually achieving maximum financial well-being.

He suggests you limit what you spend to the first 10% of your bonus, then establish priorities on what you want to do with the rest. For instance, use it to make provision for future emergencies.

"You should have between three and six months' salary saved in an interest-bearing structure where you can access your money within 48 hours. A basic money market fund would be good vehicle to achieve this objective," suggests Hawes.

"Putting money into debt for emergencies means you pay off debt, but you then go back into debt to pay for emergencies. You thus end back where you started – no savings - and debt to pay."

Hawes says the aim with reducing debt should be to settle it permanently.

"You only start to grow your wealth when you save in structures that grow your money. Start your journey to earning interest and investment growth rather than just paying interest endlessly," he suggests.

A third priority, in his view, could be addressing retirement. He points out that, currently, 27.5% of taxable income can be contributed to any retirement fund and you can claim this as a tax deduction.

Last but not least, he says one can use the 13th cheque for savings.

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