There are a number of tax planning opportunities to minimise your tax bite and achieve your financial objectives. One of them is the Tier 3 (voluntary) contribution, or provident fund, which can be leveraged by the employer, the employee, or both.
Apart from the mandatory 18.5% of basic salary contributed by both employer and employee, many clients are unaware that there is tax relief on a further 16.5% of basic salary that can be contributed to a provident fund.
As an employee you can ask your employer to deduct any amount up to a threshold of 16.5% of your basic salary and invest it in a provident fund, reducing your monthly tax liability while enhancing the future value of your retirement package. As an employer, contributing part or all of the 16.5% for your staff is a deductible expense and therefore acts as a tax shield as well as a motivator.
What the National Pensions Act provides
Section 112 of the National Pensions Act 2008 (Act 766) sets out the incentives:
- 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.
- 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 to the extent of their respective contributions.
Withdrawals
- On or after retirement, a withdrawal of accrued benefits shall be tax exempt.
- Withdrawals by contributors in the formal sector before ten years of contributions and before retirement are subject to the appropriate income tax.
- Withdrawals by contributors in the informal sector before five years of contributions and before retirement are subject to the appropriate income tax.
This is not tax advice, and readers are encouraged to seek the guidance of a Chartered Tax Advisor before making any decision.