Provisional Tax

As a business or individual in South Africa, you may be wondering what provisional tax is and whether it applies to you.

Provisional tax is an important part of taxation in South Africa.

It is important to understand how it works and how to calculate your provisional tax.

In this blog article, we will provide a simple guide to provisional tax in South Africa, including:

  • who needs to pay,
  • how to calculate it,
  • what the benefits of paying it are,
  • and the dates in South Africa,
  • common mistakes to avoid
  • how to file a return
  • advice for businesses and individuals paying provisional tax.

What is Provisional Tax?

South African businesses and individuals pay provisional tax, a form of income tax, every six months.

It is an estimate of a taxpayer’s income for the current year to ensure that the taxpayer pays the correct amount of tax.

A provisional tax system is a form of advance tax payment.

The taxpayer’s income tax liability at the end of the year will be credited with any overpayment of provisional tax.

The South African Revenue Service (SARS) together with the Income Tax Act requires taxpayers to pay tax sooner.

This is to ensure that they do not owe a large amount of tax at the end of the tax year.

Provisional tax is a form of self-assessment.

This means that it is up to the taxpayer to estimate their income and calculate their provisional tax liability.

Who Needs to Pay Provisional Tax?

Provisional tax is applicable to both businesses and individuals.

Companies, close corporations, trusts, and any other entity that must register for income tax must pay provisional tax.

Individuals who are required to pay provisional tax include:

  • sole proprietors (incl. freelancers or any individual trading in their own name),
  • partners in a partnership,
  • members of a close corporation,
  • and any other individual earning other sources of income.

For the vast majority of the population who only earn a salary as an income, and who regularly pay pay-as-you-earn (PAYE) on it, they would not need to register and complete provisional tax.

You will only be required to register for provisional tax and submit these returns once you earn an income where no regular taxes are netted off.

For example, If you are earning a salary and rental income, your salary will be subject to PAYE but not your rental income.

This will put you in the provisional taxpayer category.

If you receive regular income other than a salary, and no regular taxes are deducted from it, you must register as a provisional taxpayer.

Those who need to submit provisional tax must register and will be referred to as provisional taxpayers.

How Does Provisional Tax Work?

Provisional tax works by estimating the taxpayer’s income for the current year and calculating the tax liability based on that estimate.

The taxpayer is then required to pay the estimated amount of tax every six months.

At the end of the year, the taxpayer’s actual income is determined, and the taxpayer’s actual tax liability is calculated.

If the taxpayer has overpaid provisional tax, the overpayment is credited against the taxpayer’s income tax liability.

How to Calculate Your Provisional Tax

Calculating your provisional tax can be a complicated process.

But there are some simple steps that you can follow to help you calculate your provisional tax liability.

The first step is to estimate your income for the current year.

This should include all sources of income, including salary, business profits, rental income, and any other taxable income.

It’s important to note that all income needs to be included in income, irrespective of whether it has been received in cash or not.

If money is still to be received, then the income accrues and will still need to be included in the calculation.

The next step would be to calculate all your deductions and reduce your income calculate above by this amount.

Deductions are essentially the expenses incurred to carry on a trade that generates the income above.

You would then need to calculate your estimated taxable income.

This is calculated by reducing your income (step 1) by the total amount of deductions (step 2).

The below is essentially the calculation of taxable income.

estimate taxable income
Calculation of taxable income

Once your taxable income is calculated you will then need to calculate your estimated tax liability.

This can be done using either our Individuals Income Tax Calculator or our Small Business Tax Calculator.

This is depending on whether you are an individual (trading as a freelancer or sole proprietor) or a small business (meeting the requirements of an SBC).

In most other cases, if you are just a normal company, the tax rate would be 28%.

This calculator will calculate your estimated tax liability based on your estimated income.

Individuals (or sole proprietors) and small businesses utilise different tax rate tables and therefore must calculate accordingly.

The last step is to calculate your total estimated tax.

This is done by taking the estimated tax liability and reducing it by any taxes previously paid.

This includes employees’ tax paid and provisional tax paid and any allowable foreign tax credits in the period.

This will give the tax payable that will need to be paid over to SARS.

What Are the Benefits of Paying Provisional Tax?

Paying provisional tax can be beneficial for taxpayers in several ways.

Firstly, it ensures that the taxpayer does not owe a large amount of tax at the end of the year.

This can help to reduce the financial burden of a large tax bill.

Additionally, it can help to ensure that the taxpayer does not incur any penalties or interest charges for late payment of tax.

Provisional tax can also help to cover expenses that may arise during the year.

This can be beneficial for businesses and individuals who are expecting large expenses during the year.

As it can help to cover the cost of these expenses.

Finally, paying provisional tax can help to reduce the amount of paperwork that is required at the end of the year.

This is because these payments are credited against the taxpayer’s income tax liability.

Thus reducing the amount of paperwork that needs to be completed at the end of the year.

Dates in South Africa to File These Returns

In South Africa, provisional tax payments are due on the following dates:

  • First payment – 31 August
  • Second payment date – 28 February

Please note: this is based on the taxpayer having a financial year end of 28 February each year.

The dates will need to be adjusted should you have any other year-end.

If you miss a provisional tax payment, you may be liable for penalties and interest charges.

It is important to ensure that you make your payments on time to avoid these penalties and interest charges.

On the flip side, should you have calculated an estimated tax asset (essentially a refund), you will still need to submit a return.

Your submission would be nil in this instance and one cannot claim a refund when submitting provisional tax returns.

Refunds are distributed when the final income tax return or annual tax return has been submitted and only if the taxpayer has still calculated a refund.

How to File a Provisional Tax Return

When filing a provisional tax return, it is important to ensure that all of the information is accurate and up to date.

This includes information such as your estimated income, taxes paid, and any deductions or credits that you are claiming.

Once all of the information is complete, the return can be submitted to SARS.

Advice for Businesses and Individuals

If you are a business or individual who is paying provisional tax, there are a few pieces of advice that you should keep in mind.

Firstly, it is important to ensure that you make your payments on time.

If you miss a payment, you may be liable for penalties and interest charges.

It is also important to ensure that you are claiming all of the deductions and credits that you are entitled to.

This will help to reduce your provisional tax liability and ensure that you do not owe a large amount of tax at the end of the year.

Additionally, it is important to keep accurate records of your tax payments.

This will help to ensure that you can accurately calculate your tax liability and accurately file your provisional tax return.

Finally, always consult with a trusted and experienced accountant or tax consultant.

Doing your provisional tax returns yourself with no prior knowledge will most likely end up in errors as the process can be quite technical.

Consulting with experienced persons will also assist in reducing your tax liability.

Conclusion

Provisional tax is an important part of taxation in South Africa.

It is important to understand how it works and how to calculate your provisional tax liability.

In this blog article, we have provided a simple guide to provisional tax in South Africa, including:

  • who needs to pay,
  • how to calculate it,
  • what the benefits of paying it are,
  • the dates in South Africa,
  • common mistakes to avoid,
  • how to file a return,
  • and advice for businesses and individuals paying provisional tax.

If you have any questions about provisional tax in South Africa, please do not hesitate to contact us.

Our experienced team will be glad to assist you and provide you with the information that you need.