Reducing your taxes with CPF and SRS
- weareinvestable
- Dec 15, 2023
- 4 min read
Updated: Feb 18, 2024
For high earners in Singapore, the pursuit of financial excellence goes beyond amassing wealth; it's about retaining a significant portion of what you earn.
This guide unravels three pivotal strategies for tax optimisation tailored to the Singaporean context: Understanding Singapore's Progressive Tax System, Leveraging Central Provident Fund (CPF) Contributions, and Utilising the Supplementary Retirement Scheme (SRS).
Understanding Singapore's Progressive Tax System: Navigating Income Brackets
At the heart of Singapore's fiscal framework is a progressive tax system meticulously designed to ensure that individuals with higher incomes contribute proportionally more to taxes. As your income ascends, you traverse distinct tax brackets, each accompanied by its specific tax rate.
Income | Tax rate |
First S$20,000 | 0% Income up too the first S$20,000 is not taxed. |
Next S$10,000 | 2% Income between S$20,001 and S$30,000 is taxed at a rate of 2% |
Next S$10,000 | 3.5% Income between S$30,001 and S$40,000 is taxed at a rate of 3.5% |
Next S$40,000 | 7% Income between S$40,001 and S$80,000 is taxed at a rate of 7% |
Next S$40,000 | 11.5% Income between S$80,001 and S$120,000 is taxed at a rate of 11.5% |
Next S$40,000 | 15% Income between S$120,001 and S$160,000 is taxed at a rate of 15% |
Next S$40,000 | 18% Income between S$160,001 and S$200,000 is taxed at a rate of 18% |
Next S$40,000 | 19% Income between S$200,001 and S$240,000 is taxed at a rate of 19% |
Next S$40,000 | 19.5% Income between S$240,001 and S$280,000 is taxed at a rate of 19.5% |
Next S$40,000 | 20% Income between S$280,001 and S$320,000 is taxed at a rate of 20% |
Above S$320,000 | 22% Income above S$320,000 is taxed at a rate of 22% |
*Data is accurate as of 15th December 2023.
Suppose your annual income is $150,000. The first $20,000 will not be taxed. The next $10,000 is taxed at 2%, the subsequent $10,000 at 3.5%, the following $40,000 at 7%, and the remaining $70,000 at 11.5%. Your total tax payable would be the sum of these calculations.
For high earners, comprehending these tax brackets becomes a strategic imperative. By skilfully managing income to reside within a lower tax bracket, employing methods we'll discuss shortly, high earners can optimise tax liabilities while adhering to Singapore's progressive tax structure. This nuanced approach harmonises financial decisions with the inherently progressive nature of taxation, enabling informed choices for superior tax optimisation.
Leverage Central Provident Fund (CPF) Contributions:
Your Central Provident Fund (CPF) isn't merely a retirement savings tool; it evolves into a potent instrument for tax planning. High earners, on a quest for financial acumen, strategically harness the power of CPF contributions for substantial tax savings. Maximising contributions to both the Ordinary and Special Accounts not only secures a robust retirement nest egg but also diminishes taxable income.
Consider the scenario of a high earner contributing the maximum allowable amount to their CPF accounts. The intricacies of CPF contributions become a pivotal facet of the high earner's tax optimisation strategy. Every dollar strategically allocated serves not only the goal of retirement security but tax benefits.
To understand more on using CPF contributions for tax relief, please go to CPF’s FAQ <insert link: https://www.cpf.gov.sg/member/faq/growing-your-savings/retirement-sum-topping-up-scheme/how-much-tax-relief-can-i-enjoy>.
Utilise SRS (Supplementary Retirement Scheme):
The Supplementary Retirement Scheme (SRS), an initiative by the Singapore government, stands as a voluntary savings scheme encouraging individuals to secure their retirement while relishing tax benefits. Operating as a long-term savings tool, the SRS empowers contributors to earmark a portion of their income for retirement, coupled with specific tax advantages.
Key Features of SRS:
Voluntary Contributions
Flexibility defines SRS contributions, offering contributors the autonomy to decide their annual contribution amount. While a contribution cap exists and is subject to periodic review, this flexibility allows contributors to tailor their savings strategy based on evolving financial circumstances.
Tax deductions
One of SRS's paramount benefits lies in the tax relief it bestows. Contributions made to the SRS qualify for tax deductions, enabling individuals to claim these contributions as deductions from their assessable income. This not only reduces their taxable income but also translates into immediate tax savings—a tangible advantage for contributors.
Tax on withdrawals
While withdrawals from the SRS are subject to tax, the tax treatment is favorable. Only 50% of the withdrawn amount faces taxation, with the remaining 50% considered tax-free. This mechanism of tax deferral and partial exclusion proves advantageous during retirement, especially if the individual's income tax rate is lower in their retirement years.
Investment opportunities
SRS contributions aren't relegated to idleness; contributors wield the flexibility to invest their SRS funds across various financial instruments, encompassing stocks, bonds, and unit trusts. This affords contributors the potential for long-term growth in their retirement savings.
Age for withdrawals
Withdrawals from the SRS can commence upon reaching the statutory age (currently 63). However, contributors enjoy the flexibility to plan withdrawals based on their retirement needs and tax considerations, eliminating immediate obligations. Do take note that you will need to withdraw all your SRS monies within 10 years once you have started.
Contribution cap
Nationality | Contribution cap |
Singaporeans | S$15,300 |
Foreigners | S$35,700 |
To decide if this is suitable for you, read our article <link to article 8. Navigating the Supplementary Retirement Scheme> for 3 key considerations before contributing to SRS.
How SRS Works in Practice
Contributions
Consider contributing $15,000 to your SRS account in a given year.
Tax Deduction
This $15,000 contribution becomes eligible for tax deduction, reducing your overall tax liability for the year.
Investment Growth
The contributed amount can then be invested in chosen SRS instruments, potentially growing over the years and bolstering your retirement savings.
Withdrawals
Upon reaching the age of 63, withdrawals commence. If your SRS account has grown to $200,000*, only 50% of the withdrawn amount is taxable. Say you withdraw $40,000 in each year, the taxable income would be $20,000.
By strategically employing the SRS, high earners can capitalise on immediate tax relief, the prospect of long-term investment growth, and a tax-efficient withdrawal structure during retirement. It emerges as a powerful tool aligned with the government's goal of empowering individuals to shape their retirement destiny while enjoying tax advantages along the way.
In essence, mastering the intricacies of financial management for high earners in Singapore requires a strategic blend of maneuvers: comprehending the progressive tax system, optimising CPF contributions, and utilising the Supplementary Retirement Scheme (SRS). Each element plays a distinctive role in fostering a comprehensive approach to financial control.
If the intricacies of implementing these strategies seem daunting, or if you seek personalised guidance, we're here to help.
This is an article by InvestAble.
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