Thursday, November 20, 2008

Cut your EPF to 8%; pay more taxes!

If your pay is about RM4,500/month, and you have no life insurance, you will actually pay more taxes if you decide to reduce your EPF contribution to 8%.

That's because up to RM6,000 of EPF contributions and life insurance premiums are tax-deductible. Here is the calculation:
  1. You earn RM54,000 per year. 11% EPF = RM5,940, which is tax-deductible. There is also RM8,000 of personal relief. So your net taxable income is RM40,060. The tax on that will be RM2,183 (tax rate is RM1,525 on the first RM35k and 13% on the next RM15k).
  2. The EPF contribution is reduced to 8% = RM4,320. That is equal to RM1,620 extra in your pocket every year. Very nice? Did you realise that's not all yours? That extra is now taxable income! So your net taxable income is RM41,680 and you will be paying RM2,393 of federal income tax.
  3. The BN federal government will be taking an RM210 (RM2,393 vs RM2,183) of taxes from you ie 13% of that extra which you thought was all yours.
Of course, the better-paid employees with hefty life insurance premiums are already well over the RM6,000 ceiling for tax-deductibility, so they won't be affected. But aren't these measures supposed to help the poorer?

Is that why the BN government made the 8% option automatic? Perhaps you'd better head over to EPF and insist you want to keep paying 11%.

1 comment:

Anonymous said...

hi how about PCB deduction, it is affected? Do we have to pay more tax upfront?