Tax is one of the most underestimated forces in an investment portfolio, and while investors naturally tend to focus on performance, costs and market movements, the way in which an investment is taxed can have a meaningful impact on the return that ultimately lands in your hands. For this reason, tax planning should form an integral part of investment planning, with the most appropriate structure for your money depending not only on your time horizon and risk profile, but also on the nature of the return you are likely to earn, your marginal tax rate, your age, your need for liquidity and the role that the investment plays in your broader financial plan. Cash, bonds, unit trusts, endowments, retirement funds and tax-free savings accounts are all taxed differently, and understanding these differences can help investors make more informed decisions.
Interest-bearing investments
Interest-bearing investments, including bank deposits, money market funds, fixed deposits, South African Retail Savings Bonds and certain bond-based investments, generate interest income which is taxable in the hands of the investor. For the 2026/27 tax year, South African taxpayers still enjoy an annual local interest exemption of R23 800 if they are under age 65, and R34 500 if they are 65 or older. Any local interest earned above these thresholds is taxed at the investor’s marginal tax rate, which for individuals ranges from 18% to a maximum of 45%.
It is important to remember that South African tax residents are generally taxed on their worldwide income, which means that foreign interest must be declared in rands on your tax return. The annual interest exemption applies to South African-sourced interest, while foreign interest is generally included in taxable income and taxed in South Africa, subject to any applicable foreign tax relief, double-tax agreement provisions or other relevant rules. Where foreign tax has already been withheld, the investor may be able to claim relief for foreign taxes paid, although it is essential that correct disclosure is made on the tax return. This is particularly relevant for investors who hold offshore bank accounts, foreign-domiciled funds or global investment portfolios that distribute interest income.
Dividends and equity investments
When it comes to dividends, note that they are taxed differently. Dividends received by individuals from South African companies are generally exempt from normal tax, but dividends tax is withheld at source at a rate of 20% before the net dividend is paid to the investor. In practice, this means that the investor receives the dividend after tax has already been deducted and paid over to SARS by the company or regulated intermediary. Where local equity exposure is held through a unit trust, dividends tax will similarly be withheld on ordinary local dividends before the net distribution is paid or reinvested. Investors should, however, be aware that listed property or REIT distributions may be taxed differently and should not automatically be treated in the same way as ordinary local dividends.
Capital gains tax
Capital gains tax becomes relevant when an investor disposes of an asset, such as selling units in a unit trust, shares in a listed company or other discretionary investments. For individuals and special trusts, the annual capital gains exclusion has increased from R40 000 to R50 000 for the 2026/27 tax year. Thereafter, 40% of the net capital gain is included in taxable income and taxed at the investor’s marginal tax rate, resulting in a maximum effective CGT rate of 18% for individuals.
In the context of unit trusts, it is worth noting that a capital gains tax event is generally triggered when the investor sells units, switches between funds, or otherwise disposes of an investment – although the buying and selling of underlying shares or bonds within the fund does not, in itself, create a CGT event for the unit holder. This distinction is important because it allows investors to remain invested in professionally managed portfolios without necessarily triggering tax every time the fund manager makes changes within the portfolio.
Where foreign investments are sold, note that the capital gain must be calculated in rands, using either the average exchange rate for the year of assessment or the spot rate on the date of disposal, depending on the method applied. This means that exchange rate movements can have a significant effect on the rand-based capital gain, even where the underlying offshore asset has not moved dramatically in foreign currency terms. For South African investors with global portfolios, the tax consequences of disinvesting should therefore be considered before any switch, withdrawal, or portfolio restructure is implemented.
Endowment policies
Endowment policies remain useful in specific circumstances, particularly for investors whose marginal tax rate is higher than the tax rate applicable within the policyholder fund. Within the individual policyholder fund, income is taxed at 30%, dividends tax is generally withheld at 20%, and capital gains are taxed at an effective rate of 12%. For high-income earners, this can be beneficial, especially where the underlying investment is expected to generate meaningful interest income or taxable distributions. That said, endowments should not be used purely for tax reasons without understanding their restrictions. Effectively, they are long-term insurance policies with a minimum five-year restriction period, during which access to capital is limited. For investors who require liquidity, flexibility or full control over withdrawals, a discretionary unit trust may still be more appropriate despite the potentially higher tax rate.
Retirement funds
Pension, provident, and retirement annuity funds remain among the most tax-efficient long-term savings vehicles available to South African investors, while preservation funds play an important role in protecting accumulated retirement savings when changing employment. This is because contributions to pension, provident and retirement annuity funds are tax-deductible up to 27.5% of the greater of taxable income or remuneration, subject to an annual cap. With effect from 1 March 2026, this cap has increased from R350 000 to R430 000 per tax year, which is a welcome adjustment for higher-income earners and business owners who are able to make larger retirement-fund contributions. Contributions above the allowable deduction are carried forward to future tax years and may also be used to reduce tax on retirement lump sums or qualifying annuity income in terms of the applicable tax rules.
The introduction of the two-pot retirement system on 1 September 2024 has changed the way in which retirement fund contributions are allocated and accessed, but it has not changed the fundamental tax efficiency of retirement funds. Ongoing contributions are split between a savings component and a retirement component, with one-third allocated to the savings component and two-thirds allocated to the retirement component. Members may make one withdrawal per tax year from the savings component, subject to a minimum withdrawal of R2 000, while preservation applies to the retirement component. Withdrawals from the savings component are taxed at the investor’s marginal tax rate, which means that accessing these funds should be approached with caution. That said, while the ability to access a portion of retirement savings can provide relief in genuine emergencies, premature withdrawals can compromise long-term retirement outcomes and interrupt the benefits of tax-free compounding.
Tax-free savings accounts
Tax-free savings accounts also play an important role in a well-structured investment plan, although in our experience, they are often misunderstood. Contributions to a TFSA are made with after-tax money, meaning there is no upfront tax deduction. The benefit lies in the fact that all growth within the investment is tax-free in that no tax is payable on interest, dividends or capital gains, and withdrawals are not taxed. Note that from 1 March 2026, the annual TFSA contribution limit has increased to R46 000, while the lifetime contribution limit remains R500 000. Importantly, contributions above the permitted limits are penalised at 40% of the excess contribution, so investors should keep careful track of amounts contributed across all TFSA accounts.
The key takeaway
The key takeaway here is that, while tax should not drive every investment decision, it should inform the structure of every investment plan. A portfolio that is tax-efficient but poorly aligned with the investor’s objectives is not a good portfolio. Equally, a well-performing investment that is housed in the wrong structure may create unnecessary tax liabilities, liquidity constraints or estate-planning complications. The art lies in ensuring that each investment is positioned in the most appropriate vehicle, taking into account the investor’s tax rate, investment horizon, income needs and long-term objectives.
Have a fabulous day.
Sue
