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The Ultimate Guide to Reducing Personal Income Tax (Legally & Responsibly)

Income tax is probably one of the highest taxes we have to pay, especially if we earn a significant amount. As fellow responsible Singaporeans, it’s important that we contribute back by paying our dues. However, there are other ways we can do so too – here’s how to reduce your income tax, but still play your part as a responsible citizen! 

No matter how much we Singaporeans complain about having to pay taxes, we cannot deny that tax is one of an imperative funnel in developing a stronger community, a better environment and a more prosperous economy for us to live in. Before we get into the tricks to reducing your personal income tax, do you actually know what happens to the taxes you pay? No, it’s not just to fund the top ministers like what you think (although a portion of it does go to their pay checks) or to our annual firework displays, a huge proportion goes towards building the city we live in right now. This can be evidently seen in the pie chart below!

As you can see, tax is an integral part of Singapore’s fiscal policy – aimed to raise revenue for government operations and to promote social and economic goals. Without taxes, we wouldn’t have the various Budget 2020 schemes that you’re probably benefitting off too.

Now, the million-dollar question is: So how do you reduce the amount of personal income tax you have to pay, yet still remaining a responsible contributing citizen? 

Living in one of the most expensive cities in the world, financial management is an important survival tool to compete with the superrich. Proper tax planning is an integral component of this that goes a long. Contrary to popular belief, this is not just exclusive to High-Net Worth Individuals, you may not be earning as much but proper tax planning can go a long way too. Remember, your tax obligations can impact your disposable income, and proper tax planning can translate to substantial savings in the future.  

1. Donations

The Singapore government allows you to claim a tax reduction of 2.5 times the donation amount if the cash donations are made to an approved Institution of a Public Character (IPC). You have to go to the Charity Portal to find all the charities with IPC status – note that donations made to charity without approved IPC status are not tax-deductible! 

Donations have to be carried out in the year preceding the year of assessment. That means that if you want a tax reduction for the year 2020, the donation must have already been made in 2019. It is a win-win situation here where you do good by giving to charities and reap the benefits of lower income tax. However, bear in mind that these donations must come with no benefits for yourself – you do not receive any material benefits, such as advertising exposure or other gifts in kind. 

2. Contribute to your Supplementary Retirement Scheme (SRS)

The Supplementary Retirement Scheme (SRS) is a voluntary scheme to encourage individuals to save for retirement, over and above their CPF savings. One has to first apply for an SRS Account with any of the 3 authorised local banks – DBS, UOB or OCBC. This is not just a useful tool to boost your retirement planning, but also a valuable tool to minimise your tax expenses. The annual SRS contribution is capped at S$15,300 for Singapore citizens and permanent residents and S$35,700 for foreigners. Contributing to SRS accounts is eligible for dollar-for-dollar tax relief. An individual with a taxable income of S$70,000 will save about S$1,071 in his income tax when he contributes S$15,300. Unfortunately, SRS does not give a fixed 2.5% interest rate like CPF but if you have a more aggressive risk profile, you can consider investing into financial products. Naturally, all investment gains will accumulate tax-free in SRS. Upon age 62, the you can apply to start withdrawing the money from your SRS account, where 50% of the funds withdrawn would be subject to income tax.

3. Voluntary CPF Top Ups

Besides the SRS contribution, you can also turn to voluntary CPF top ups, either way this platform does provide a higher interest rates as compared to banks or SRS account. The CPF Minimum Sum Topping-Up Scheme allows you to claim a tax relief when you top-up your CPF savings or when the top-up is made by your employer. Furthermore, you can claim additional relief if you top-up your family members’ Retirement Account or Special Account, but provided that their annual income does not exceed S$4,000 in the preceding year. 

For cash top-ups below S$7,000 made by you or your employer, you are entitled to a tax relief equal to the amount of top-up. For cash top-ups amounting to S$7,000 or more, the tax relief is capped at S$7,000. For top-ups you contributed to the CPF of a family member, you can claim additional relief equal to the amount of cash top-up, capped at S$7,000. Therefore, the maximum CPF top-up relief you can make per year is S$14,000.

Likewise, you can make cash top-ups to your Medisave Account, where funds will be used to offset medical bills, paying of premiums. Tax reductions is only applicable to voluntary contributions and not compulsory contributions and only if you have not reached your Basic Healthcare Sum (BHS), which for those who are turning 65 in 2020, is $60,000. This is an excellent way to set aside money for medical expenses, at the same time able to earn at least 4% interest per annum. 

4. Government Tax Reliefs

Hey, let’s also not forget there are already existing tax reliefs that the government do provide for all taxpayers in Singapore. 

This is not an exhaustive list, there are many more reliefs put in place. Check out the other reliefs and see what you may be entitled to! 

As your income rises, you will soon see that your income taxes rise disproportionately and you could be paying a huge chunk if you are not savvy about the various relief schemes made available for you. Considering how much you actually have to pay, your future self will thank you for saving on your taxes. 

Almost everyone you know will have to pay income taxes. Do them a favour, share this article with them


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