KAMPALA – 1. 5% NSSF contribution will be deducted before applying the PAYE rates. Lower personal income tax in the short run.
1. In a way, as far as I see, it’s a deferred but increased tax obligation. Government strategically targets to tax the employee and employer contributions as well as the capital gains that were initially tax exempt. Employer contributions are allowable expenses before corporation tax. This hasn’t changed. What has changed however is that such contributions are now a target of taxation at the time of benefit payments.
2. Unlike in the past, all employers irrespective of number of employees can register and make contributions for their employees. This is a positive development that brings more citizens into the social security savings realm.
3. Section 13A introduces a voluntary saving scheme where members and their employers can contribute more than the initial mandatory 5+10%. This will encourage more savings.
4. The introduction of a provision that expressly states that the board will lend to government is quite suspect. With the fiscal indiscipline pervasive in government spending, this puts the fund at great risk. This for me is the hidden but most controversial part of the amendment.
5. Current balances in NSSF will not be affected by introduced tax. This is to avoid double taxation. The segregation of such contributions and their related capital gains will provide quite some systemic challenges to implement.
6. When you take the option to save more with NSSF under the voluntary savings scheme, you reduce your PAYE tax obligation. This can be handy for tax planners to reduce or even eliminate the personal tax obligation. If an employee exceeds the exemption threshold by UGX 100,000 after deducting the mandatory NSSF contribution, they may decide to make a further 100,000 contribution to NSSF to legally avoid paying the tax now. This would encourage savings even though you expose the same income to a tax in future.
7. Those who may not claim their benefits until they are 60 years of age can fully avoid this tax as their benefits are exempt. This will further encourage members to wait an extra 5 years. The opportunity cost of not waiting is certainly quite high. Besides earlier access would partly defeat the social security intended for old age.
8. Access to the savings on medical grounds and survivors benefit in the event of death are tax exempt.
9. The reason for the 0.05% of the total assets annual levy to the regulatory authority is quite unclear. And why total assets and not net?
The reform is a welcome development as long as it’s not abused by selfish political manoeuvres. I would also have loved to see the reform tackling all issues relating to retirement benefits including government pensions and gratuity. It may as well be too early to celebrate increased savings if inflation that erodes our purchase power isn’t checked to ensure that the returns and capital gains on the savings are meaningful.
The writer is an accounting professional.