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As announced in the 2011 Budget, income tax deductions for medical scheme contributions for taxpayers below 65 years have been converted into tax credits as from 1 March 2012.
The medical tax credit is a fixed amount that will be offset against tax payable. It will replace the tax deduction that was granted for medical scheme contributions, and is applicable to a person or a dependant with or without a disability.
Where a person with a disability is not involved, medical scheme contributions in excess of four times the total credits and out-of-pocket medical expenses combined in excess of 7.5% of taxable income, can be claimed as a deduction from taxable income.
For a person with a disability or with a dependant with a disability, medical scheme contributions in excess of four times the total credits and out-of-pocket medical expenses can be claimed as a deduction from taxable income.
As from 1 March 2014, these additional medical deductions claimed by taxpayers aged below 65 years will also be converted to medical tax credits at a rate of 25 per cent (33.3 per cent for persons with disabilities or dependants with disabilities).
Why the change?
The system of tax credits seeks to bring about greater fairness. All taxpayers, no matter what their income, will derive an equal tax benefit for their medical scheme contributions because the tax credit is a fixed amount. The current system of deductions for medical scheme contributions had the effect that the higher your income the higher the value of your deductions.
What is the difference between a tax credit and a tax deduction?
• A tax deduction will generally lower the taxable income on which you pay tax. For example, the amount you contribute to your medical scheme is deducted from your taxable income so that you pay tax on a smaller amount.
• A tax credit will generally lower the tax you must pay. Once your tax is calculated the tax credit is then offset against this tax payable to reduce the amount of tax you pay.
How will the new system work?
For the tax year starting 1 March 2012 if you are younger than 65 years of age a tax credit for medical sheme contributions will be granted to you per month as follows:
• R230 for the taxpayer
• R230 for the first dependant
• R154 for each additional dependant.
How will this affect you?
The effect of the medical tax credit will depend on your individual circumstances. But generally low income earners will experience an increase in net pay, while high income earners will experience a decrease in net pay to bring about equality in the tax system for medical scheme contributions. Here are some examples to show how the new system will work. How these amounts will be influenced by the new tax rates announced by the Minister in his Budget Speech is also shown below.
Example 1
Taxpayer A earns a monthly salary of R16 040. He makes a monthly contribution of R1 203 to a pension fund and R2 263 to a medical scheme for himself and three dependants.
Tax deduction system
Under the current system – after deductions for his pension contribution and his medical scheme contribution – his take home pay is R11 202.
Tax credit system
Implementing the proposed tax credit system using the current tax rates (2011/12), Taxpayer A would take home R11 404 This is R202 more than he would get under the tax deduction system.
But due to the tax relief announced by the Minister of Finance in his Budget Speech yesterday, and the new tax rates, Taxpayer A will take R11 519 home from March 2012 – an additional R317 compared to the current system.
Example 2
Taxpayer B earns a monthly salary of R48 750. She makes a monthly contribution of R3 656 to a pension fund and R5 506 to a medical scheme for herself and three dependants.
Tax deduction system
Under the current system – after deductions for her pension contribution and her medical scheme contributions – her take home pay is R28 576.
Tax credit system
Implementing the proposed tax credit system using the current tax rates (2011/12), Taxpayer B would take home R28 462. This is R114 less than she would get under the tax deduction system.
But due to the tax relief announced by the Minister of Finance in his Budget Speech yesterday, and the new tax rates, Taxpayer B will take R28 800 home from March 2012 – an additional R224 compared to the current system.
Can you still claim for out of pocket medical expenses if a person with a disability is not involved?
Yes, you can still claim medical expenses not covered by your medical scheme, as well as medical scheme contributions paid by you in excess of four times the medical tax credit.
However, only the amount in excess of 7.5% of taxable income (before this deduction) will be allowed.
How do the changes affect taxpayers over 65 years?
You will not be affected by the changes that come into operation on 1 March 2012.
The Minister has indicated that as from 1 March 2014 taxpayers 65 years and older will be able to convert all medical scheme contributions in excess of three times the total tax credits plus out of pocket medical expenses into a tax credit of 33.3%.
(Press release from the South African Revenue Service, August 2012)
