Hard-earned money grows faster in a tax-free savings account

Johann Rossouw | 15 June 2022

Johann is an Associate Financial Planner at Fiscal Private Client Services. He holds the Certified Financial  Planner® accreditation and has a keen interest in personal finance and how financial markets affect our everyday lives.

One of the most powerful investment vehicles available to the South African investor is the tax-free savings account.

A tax-free savings account is an investment vehicle which allows you to invest tax free up to certain limits.

Each individual investor is allowed to contribute up to R36 000 towards a tax-free savings account within a tax year, with lifetime contributions limited to R500 000.

The interest, capital gains and dividends earned within the tax-free savings account are tax free, making this an extremely tax-efficient investment vehicle. Read more: What do I need to know about investing in a tax free savings account?

As with all things in life, there is a caveat and the tax-free savings account is no different. You are not allowed to contribute more than the annual limits (currently R36 000 per tax year) towards this investment vehicle. If you exceed this limit, your investments above the limit will attract hefty penalties from the tax man.

How the benefits stack up

The benefits of a tax-free savings account are best illustrated by use of an example. Let’s assume the following:

  • Two friends, Sam and Sam’s Bestie, each invest R36 000 every year for the next ten years.
  • Sam and Sam’s Bestie both pay income tax and have a marginal tax rate of 45%.
  • Sam invests R36 000 in a tax-free savings account, while Sam’s bestie invests R36 000 in a normal unit trust.
  • The investments only achieve capital growth – we are ignoring interest and dividends earned.
  • After 10 years, both investments have grown to R650 000.

Should Sam decide to withdraw the full balance from the tax free savings account, R650 000 will be paid into Sam’s bank account as no taxes will be payable.


Invests in
Tax free saving account Ordinary unit trust
Amount invested per year R36 000 R36 000
Number of years invested 10 years 10 years
Balance after 10 years R650 000 R650 000
Amount available R650 000 R605 000
Tax paid R0 R45 000

Should Sam’s Bestie decide to withdraw, however, capital gains tax (CGT) will have to be paid on the withdrawal from the unit trust as follows:

  • The taxable capital gains will be calculated using the current market value of the investment, subtracting the base cost, or cost of acquiring the units, and the annual CGT exemption of R40 000. The calculation will therefore be:
    Taxable Gain = R650 000 – R360 000 – R40 000 = R250 000
  • The capital gains tax payable will be calculated by multiplying the taxable gain by the CGT inclusion rate – currently 25%. The result of this must be multiplied by Sam’s Bestie’s marginal tax rate. The calculation will therefore be:
    Capital Gains Tax Payable = R250 000 x 40% x 45% = R45 000

Sam will therefore receive a whopping R45 000 more than his Bestie – all due to the tax-free nature of his investment.

This difference will, in reality, be even larger as Sam will not be liable for any taxes on dividends or interest earned in his portfolio.


No offshore investment limits

Another advantage of a tax-free savings account is that it is not subject to Regulation 28 of the Pension Funds Act. Regulation 28 limits the extent to which retirement vehicles (like a retirement annuity, pension fund, provident fund, and preservation fund) may invest in particular asset classes.

Retirement funds cannot, for example, invest more than 45% of their assets outside of South Africa. This regulation is not applicable to tax-free savings accounts – meaning you will be able to invest 100% of your savings in a tax-free savings account offshore should you wish to do so.


Long-term investment

If you contribute R36 000 per tax year towards a tax-free savings account, it will take approximately 14 years to reach the lifetime contribution limit of R500 000.

This means that a tax-free savings account is, by its very nature, a long-term investment vehicle. It is therefore crucial to have the correct asset allocation within your tax-free savings account.

Investors should, ideally, avoid cash and fixed interest investments within a tax-free savings account and aim to increase exposure to growth assets like equities.

If you are unsure about your target asset allocation and would like to learn more about how asset allocation affects your portfolio’s performance, consider talking to a financial adviser, ideally one who holds the Certified Financial Planner accreditation.


Read another article on tax free savings accounts: What are the differences between saving in a tax free savings account and a retirement fund?