Understanding the difference: Provisional tax vs Income tax
Provisional tax is not an extra or independent tax individuals and businesses have to pay. Instead, it's a way SARS is helping you to pay taxes in advance, so you can pay less tax when you file you returns. Many business owners, especially sole proprietors, mistakenly believe that after submitting their provisional taxes, they don't have to pay income tax. This is not true.
What is the meaning of provisional tax?
Provisional tax is designed to reduce your tax burden at the end of the financial year by allowing taxpayers to make tax payments in advance.
Taxpayers with an extra income above a specified threshold, or those who do not earn a regular salary, must pay both provisional and income taxes. If you own a registered business, you must pay these taxes for both your business and yourself.
Sole proprietors pay provisional tax and income tax based on their business earnings. Because they don't have a registered business, the government taxes their business income the same way it taxes an individual's income. People pay taxes on a progressive scale where the more they earn, the more tax they pay.
Businesses pay taxes based on a percentage of their taxable income. This means that the more they earn, the more tax they owe. The percentage will depend on the income and the tax category of the business. Micro businesses and small business corporations pay less taxes than companies.
Even if you have a full time job where you earn a salary and you are taxed on your salary, you must still pay income tax and provisional tax if you have a side hustle. When you are making an extra income, you have to register as a provisional taxpayer if it's above a certain threshold.
Understanding the tax differences
A common misunderstanding is the difference between provisional taxes and income taxes. Both individuals and businesses are required to pay annual income taxes.
For people earning a salary, taxes are typically deducted directly from their salaries. However, business owners who do not draw a salary use their earnings before paying taxes. This could lead to a considerable tax debt at the end of the financial year. Provisional tax provides an opportunity to reduce this debt by allowing early tax payments before income taxes are due. This is the basis of the provisional tax system.
Provisional taxpayers can file their tax declarations twice a year on an IRP6, with an option for a third filing.
When it's time to settle the income tax, the provisional tax already paid will be deducted from the total income tax bill, reducing the overall tax payment.
For example:
When you file provisional tax the first time, you paid R10 000.
When you file the second time, you pay R15 000.
When at the end of the financial year end, you have to file your income tax, and it comes to R100 000.
You will pay R100 000 - R10 000 - R15 000 = R75 000
If you earn a salary, the PAYE will also be deducted.
How to Calculate Provisional Tax
You calculate provisional tax by estimating your taxable income for the upcoming financial year. You're not paying provisional taxes on a previous tax year, unless you still owe those taxes to the South African Revenue Service. You are paying for the year to come, and only you will know how much income you're expecting to make. When you file provisional taxes, you are actually guessing how much money you'll be making in the new financial year.
Provisional tax is calculated in the same way as income tax. You have to figure out how much you think you'll make, minus the allowable deductions. That will be the amount you'll pay provisional tax on.
The South African Revenue Service (SARS) also calculates an initial amount based on the assessment from the previous financial year. SARS looks at what you made the year before, and that will be the base amount of what you're expected to pay provisional taxes on.
In short, provisional tax is a system where you pay estimated taxes throughout the year to avoid a large tax bill at the end of the financial year.
Don't let a hefty tax bill surprise you. Start planning your provisional tax payments now. Get in touch of your business needs help.
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