Tshepo Khoza, Registered Tax Practitioner
Understanding Your Retirement Annuity (RA) Tax Deduction (2026)
How does an RA reduce your tax? We explain the 27.5% rule, the R350,000 cap, and how to calculate your maximum tax-deductible RA contribution.
A Retirement Annuity (RA) is arguably the single most powerful tax-saving tool available to individual South African taxpayers.
Unlike a medical credit (which reduces your final tax bill), an RA provides a tax deduction. This means your contributions are subtracted from your total income before your tax is even calculated, which can dramatically lower your tax bracket and your overall liability.
But how does it actually work? It all comes down to two numbers: 27.5% and R350,000.
The Rule (Section 11F of the Income Tax Act)
This is the official rule, simplified. Your total tax-deductible contribution to all retirement funds (Pension, Provident, and RA) is limited to the lesser of:
- R350,000 per tax year; or
- 27.5% of your "taxable income" (whichever is higher of your remuneration or total taxable income, before this deduction).
In plain English: You can deduct what you contribute, but your deduction is capped. The cap is 27.5% of your income, and that 27.5% itself cannot be more than R350,000 for the year.
Let's Look at Two Examples:
Example 1: The Average Earner
- Annual Income: R400,000
- 27.5% Cap: 27.5% of R400,000 = R110,000
- R350,000 Cap: R350,000
The lesser of these two caps is R110,000. This is your personal maximum deduction for the year.
- If you contribute R5,000/month (R60,000/year): You can deduct the full R60,000. Your taxable income becomes R340,000 (R400k - R60k).
- If you contribute R10,000/month (R120,000/year): You can only deduct your cap of R110,000. Your taxable income becomes R290,000 (R400k - R110k).
Example 2: The High Earner
- Annual Income: R2,000,000
- 27.5% Cap: 27.5% of R2,000,000 = R550,000
- R350,000 Cap: R350,000
The lesser of these two caps is R350,000. This is your personal maximum deduction.
- If you contribute R30,000/month (R360,000/year): You can only deduct the R350,000 cap. Your taxable income becomes R1,650,000 (R2mil - R350k).
"What About My Company Pension Fund?"
This is a critical point. The 27.5% / R350,000 cap applies to all retirement contributions combined.
This includes:
- Your contributions to your company pension or provident fund.
- Your employer's contributions to your pension or provident fund (this is taxed as a fringe benefit and then treated as your contribution).
- Your personal contributions to any RAs.
If your company contributions already use up your 27.5% cap, any additional RA contribution you make will not be deductible in the current year.
What Happens to "Excess" Contributions?
Don't worry—the money is not lost!
If you contribute more than your deductible limit (like the R10,000 excess in Example 2), that amount is "rolled over" by SARS.
- It can be used as a deduction in a future tax year.
- If not used, it will be added to the tax-free portion of your lump sum when you retire (increasing your tax-free cash payout).
The "Other" Tax Benefits
Besides the deduction, all growth inside your RA is 100% tax-free. You pay no tax on interest, dividends, or capital gains, allowing your investment to compound much faster.
Conclusion:
An RA is a non-negotiable for smart tax planning. For provisional taxpayers, making RA contributions is one of the best ways to legally reduce your estimated tax payments (on your IRP6) and your final bill.
Disclaimer:This article is for informational purposes only and does not constitute financial or tax advice. Tax laws are complex and subject to change. We strongly recommend consulting with a registered tax practitioner to address your specific circumstances. TaxClaw.ai is a tool to assist you in managing your tax obligations and is not a substitute for professional advice.