How Salary Workers Pay Less Taxes

Two things are certain in life; death and payment of taxes. But do you also know that the tax laws have allowed us to pay less? Ranging from where to establish your business, which product to venture into, and how young entrepreneurs in Ghana can take advantage of the tax laws to pay minimal taxes.

But today let us discuss how salary workers can take advantage of the tax laws and pay less taxes. Section 2 subsection 1 of the Income Tax Act, 2015 (Act 896) states that "the chargeable income of a person for a year of assessment is the total of the assessable income of that person for the year from each employment, business or investment less the total amount of deduction allowed that person under this Act." The chargeable income is the amount on which one will be taxed. So one can reduce their chargeable income by taking advantage of all the total deductions due to them before tax. But how many people know about these deductions? Today we would like to talk about the provident funds. What does the law say about the provident fund?

Section 112 of the National Pensions Act, 2008 (Act 766), subsection 1 states "Subject to this Act, contributions made by an employer to a provident fund scheme on behalf of a contributor shall be treated as part of the deductible income for that employer for a tax year for the income tax. Subsection 2 states "Contributions not exceeding sixteen and one half per centum of a contributor's monthly income, made by either a contributor or the contributor's employer or both shall, be treated as deductible income, for the purpose of income tax for the contributor and the contributor's employer to the extent of their respective contributions". This simply means that one is allowed to contribute up to 16.5% of their monthly income and this amount will not be taxed. But any payment made above the 16.5% will be taxed. People wanted to pay more into tier 3 (provident fund) to avoid paying tax (Pay-As-You-Earn) to the government. So if your employer is already making some payments on your behalf, you can top up to the 16.5% to avoid paying more taxes to the government. Most employers do not pay the tier 3 contribution because it is a voluntary contribution. As part of your next job interview, you can demand a tier 3 contribution as part of your package or start paying it from your salary. Now here is where the conversation gets interesting,

Section 5 of the same pension act (Act 766) states "A withdrawal of all or part of a contributor's accrued benefits under a provident fund or personal pension scheme a) on or after retirement shall be tax exempt

b) shall be subject to the appropriate income tax for contributor's in the formal sector before ten years of contributions and before retirement". So when you withdraw after

ten years, you will not be taxed but when you withdraw before ten years, the tax rate applicable is stated in the Income Tax Regulations 2016.

Regulations 25 of the Income Tax Regulations, 2016 (L.I 2244) states "for purposes of section 94 of the Act and with reference to subsection (5) of section 112 of the National Pensions Act 2008, (Act 766), a withdrawal of funds from contributions made to a provident fund is subject to a final tax of fifteen percent". So when you withdraw your savings before 10 years, you will pay a final tax rate of 15%.

So why should you invest in a provident fund instead of being taxed directly (PAYE)

The effective tax rate (PAYE) on the Ghc 10,000 salary is 19.69%. There are no investment returns.

Whereas when you take your contributions in a provident fund after 10 years, you will not be taxed. When you take your contributions before 10 years, you will be taxed at the rate of 15% which is still less than 19.56%, and remember the higher you earn, the higher PAYE you pay. So the effective tax rate for PAYE can increase from 19.56% to 30% depending on your salary. When you contribute to a provident fund, you get investment returns; provident funds typically earn 10% to 20% annually, compounding over time.

So if you have not started paying your tier 3, you are losing out. Start preparing for it. Other forms of paying lesser taxes will follow in the following chapters.

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