It is interesting that there are a number of tax planning opportunities to minimise your tax bite and to achieve your financial objectives.
One of such variables is the Tier 3 (voluntary) contributions or provident fund which can be leveraged either by the employer or employee or both.
Apart from the mandatory 18.5% of basic salary contributed by both employer and employee, a number of clients are unaware that there is tax relief of 16.5% of basic salary contributed to a provident fund by either the employer and employee or both.
As an employee you can advise your employer to deduct any amount up to a threshold of 16.5% of your basic salary and invest in provident fund which will reduce your monthly tax liability whiles enhancing the future value of your retirement package.
As an employer, in a bid to motivate your staff, you can also make it a policy to contribute part or all of the 16.5% to a provident fund for your staff because you will gain tax shield on these payments since they are deductible expenses.
Below are the provisions of the National Pension Act 2008 (Acts 766) which throws more light on the tax incentives of Tier 3 contributions.
112. (1) 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 for the purpose of income tax.
(2) 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, for the purpose of income tax for the contributor and the contributor’s employer to the extent of their respective contributions.
(5) A withdrawal of all or part of a contributor’s accrued benefits under a provident fund or personal pension scheme:
on or after retirement shall be tax exempt;
shall be subject to the appropriate income tax for contributors in the formal sector before ten years of contributions and before retirement;
shall be subject to the appropriate income tax for contributors in the informal sector before five years of contributions and before retirement.
This is not a tax advice and readers are encouraged to seek the guidance of a Chartered Tax Advisor before making any decision.