Relieving your tax burden with your pension contributions

The recent announcement by the Minister of Finance Mr. Ken Ofori Atta on the proposed tax changes has sent shivers down the spines of many Ghanaians.

The Minister, in his mid-year budget review presentation to Parliament, proposed additional 35% band to be included in the graduated Pay As You Earn (PAYE) system to essentially increase the tax burden on individuals earning more than GHS10,000. The proposal, though yet to be approved by Parliament has left many Ghanaians talking.

As noted by the Minister, one major challenge that the country continues to face is low domestic revenue mobilisation and to address this, he is proposing an additional tax band to increase tax obligations of high income earners in Ghana as one of the numerous measures to be deployed to tackle revenue shortfalls.

Although a progressive income tax assessment appears laudable, the populace must be sensitized to understand the reasons for this approach, in particular, why there is the need for more taxes to be paid on their higher earnings.

Paying taxes in itself is obviously not something people, since the days of Mathew in the Bible, feel encouraged to do, talk less of having to pay extra on your high earnings. To encourage people to honour their tax obligations and more importantly to have the urge to pay more, it is always important to introduce incentives aimed at achieving that objective, particularly, where such incentives achieve a social goal. It is for this reason that the National Pensions Act, 2008 (Act 766) as amended, expressly exempts pension contributions from taxation in view of the need to have adequate income security during retirement to alleviate old age poverty.

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Section 3 of Act 766 provides for 18.5% of the Basic Salary of a worker to be mandatorily set aside to provide pension income for the worker when they retire from active work. Additionally, a worker may voluntarily contribute up to 16.5% of their Income into a registered Provident Fund (PF) or a Personal Pension Scheme to supplement retirement income. These contributions by and on behalf of the worker qualify for tax reliefs for the worker or his/her employer to the extent of the contribution made by either the employer or the worker. The tax relief on pension contribution can substantially reduce the tax burden of a worker and therefore Ghanaians should take advantage of the provisions of Act 766 and contribute more towards their retirement.

Under the current tax arrangements, a worker earning say GHS20,000 as Basic Salary and GHS10,000 as Allowance can make an extra tax savings of GHS1,237.50 (representing 25% of GHS4,950 contribution to a PF) if he makes additional voluntary contribution of 16.5% of his/her Income alone to a registered PF. Extending this to the new proposal by the Finance Minister means extra tax saving of GHS1,732.50 (representing 35% of the GHS4,950 contribution to the PF) could be made by this worker when the proposal is approved by Parliament.

On the basis of the above illustration, it is of a prudential benefit to the workers earning in excess of GHS10,000 to take the relevant steps to identify a registered PF and make the necessary pension contributions.

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Although Act 766, opens this window of opportunity for workers, the Ghana Revenue Authority (GRA) must, as a matter of urgency, come up with the relevant guidelines to ensure this opportunity is not abused. Under Act 766, a worker, having retired or contributed to the fund for more than 10 years, can cash out his/her accrued benefit under the PF without suffering any tax. Act 766, however, mandates GRA to apply a tax on the accrued benefits that are cashed out prior to the 10 years.

Currently GRA applies a flat rate of 15% on such early withdrawals.

Therefore, if the proposal from the Finance Minister is approved by Parliament we could potentially have a situation where a worker, earning in excess of GHS10,000, avoids paying tax at 35% with contribution to a PF and then cashes out at a tax rate of 15% if he or she so desires. From the illustration above, a worker earning in excess of GHS10,000 can avoid paying a tax of GHS1,732.5 and instead pay GHS742.50 if he chose to contribute to a PF and then cash out immediately. This is a loophole that need to be addressed immediately to prevent workers from avoiding to pay the appropriate tax.

The writer is te Manager, Standards & Compliance

National Pensions Regulatory Authority

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