Not too long ago your medical aid scheme contributions were tax deductible within limits. Then, in March 2012, SARS did away with this system and introduced Medical Scheme Fees Tax Credits (MTC).

Let’s look at two things:

• how it works, and
• why we think it isn’t fair.

What is a Medical Scheme Fees Tax Credit?

According to SARS, it is a rebate which reduces the normal tax a person pays. For those of us fortunate enough to pay tax, it’s one of the few ways available to reduce our taxes.

Do you qualify for the Tax Credit?

Anyone who pays income tax in South Africa qualifies for the credit.
To claim the tax credits, you must pay monthly contributions to a registered medical scheme – or a similar registered scheme outside South Africa.

Why were Medical Scheme Fees Tax Credits introduced?

The Medical Scheme Fees Tax Credit (MTC) was introduced to replace part of the old tax deduction that was specifically allowed for those making medical scheme contributions. The switch to tax credits was done in order to create a system that was fairer to all South Africans, regardless of their income status.

So, what they’re trying to say, is that everyone qualifies for exactly the same tax credit.

• If your medical scheme contribution is R10,000 a month, the tax credit is R200 a month,
• If your medical scheme contribution is R500 a month, the tax credit is also R200 a month.

Under the previous method, the person spending R10,000 a month got a bigger tax break than the person spending R500 a month.

The old tax deduction benefit reduced your taxable income before applying the marginal tax rate. The larger your monthly medical scheme contribution, the larger your deduction, and the lower your taxable income.

A tax credit, on the other hand, reduces the amount of tax owing by subtracting the tax credit from the actual tax payable.

Okay, so what do the deductions for next year look like?

For the 2018/2019 tax year (which ends on the last day of February 2019) here is what you are allowed as a credit:

• R310 per month for the taxpayer who paid the medical aid contributions
• R310 per month for the first dependant
• R209 for each additional dependant

So, if you have let’s say, for example, a spouse and two children, the credits you’re allowed are:

• R310 per month for yourself as the main member (Remember it doesn’t help to be the main member if you don’t pay tax)
• R310 per month for your first dependant (Who can be a child or a spouse)
• R209 per month for the second dependant, and
• R209 per month for the third dependant
• R1,038 per month in total – or R12,456 for the year

Let’s assume you pay R3,100 a month in medical aid contributions. Your contribution looks like this:

• R1,200 for the main member
• R900 for your spouse (adult dependants pay more than child dependants)
• R500 for your firstborn, and
• R500 for your youngest child

In the table below, you can see MTC in action. Of the R3,100 you spend each month, R1,038 is being subsidised by the Government if you pay enough tax: 2nd

So how does the tax deduction work in real life?

Let’s look at Paul who is younger than 65 and has no additional medical expenses beyond his medical aid monthly contribution:

With no medical aid contribution, Paul would have paid an additional R12, 456 in tax.

But did you notice what we noticed?

Problem one – Income not high enough

What if Paul only earned R60,000 a year?

Paul’s tax payable of R10,800 is less than his Primary Rebate of R14,067. He doesn’t qualify for the Medical Tax Credit. And yes, it’s easy to say he should downgrade to a much cheaper option, but what if there aren’t any? The system isn’t as fair as we are led to believe.

Problem two – The Medical Tax Credits themselves

So, let us ask you this: “By what percentage did your medical scheme contribution increase this year?” If you’re lucky, it’s 7%. If you’re unlucky, then it’s 10% or more.

Now, let’s look at by how much the Medical Tax Credits increased over the previous year:

• 2.3% increase for the taxpayer and first dependant, and
• 2.4% increase for each additional dependant.

Let’s do the math based on the R3,100 a month medical scheme contribution mentioned above.

• R3,100 x a 7% annual increase means a R217 per month increase in your cost.
• R1,038 monthly tax credit less the previous years R1,014 monthly tax credit means an increased tax saving of R24 a month (and that’s assuming your tax remains the same as it was in the previous year).

The Medical Tax Credits aren’t in line with actual costs forcing you to either downgrade your medical aid plan or pay more tax.

Conclusion

It’s almost that time of the year where you need to decide on your medical aid plan option for the year ahead. Most medical schemes require you to make this decision by early December.

Three takeaways:

1. Look at the number of people on your current medical aid plan and calculate your allowable Medical Tax Credits. Remember that the tax year starts on the 1^st of March every year and ends on the last day of February the next.

2. Then look at the cost of your medical aid plan for the year ahead. They will never match but try to get the two aligned as close as possible. Remember that medical scheme pricing runs from the beginning of January through to the end of December. This means that the cost for the months of January and February will be higher than the remaining ten months.

3. Lastly, calculate the amount of tax you’re likely to pay for the current tax year. If you’re below the tax threshold, then Medical Tax Credits are of no benefit at all.

In this article, we haven’t even broached the subject of claiming for additional medical expenses. Yes, you’re entitled to claim more than just your monthly Medical Schemes Fees Tax Credits.

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