This article was contributed to us by Endowus, a FinTech investment advisor.
For many working Singaporeans, receiving your performance bonus may be the highlight of your job each year. However, before you dream about the next big vacation, expenditure or package you’re going to commit with your bonus, you should pause and consider potential financial implications.
Here are 3 things you need to know before you receive your bonus, annual pay increment, and hopefully, your pay jump when you change jobs.
#1 You’ll Be Paying Taxes On Bonuses You Received In The Previous Year
Our income tax bill for this year (2020) based on the previous calendar year’s income. This means, for the upcoming tax reporting season, our taxable income will be based on the income earned in 2019 (or YA2020 as IRAS likes to put it).
This means taxes on bonuses you receive this year are next year’s ‘problem’.
#2 You Can Estimate Your Tax Bracket For YA2021– And Do Something About It Ahead Of Time
By adding up any bonuses you receive this year to the rest of your taxable income (such as your salary), and then deducting reliefs and deductions you qualify for, you can get a sense of which tax bracket you’ll fall into, and take actions within the year to reduce your tax bill.
Some common reliefs and deductions include reliefs for CPF salary contributions, earned income, being an NS man, making charitable donations, making voluntary CPF top-ups and topping up your Supplementary Retirement Scheme (SRS) account.
By looking at all the tax deductions and reliefs you might qualify for, you can get an idea of what you can do within the year to lower your tax bracket and final tax bill.
In particular, the Supplementary Retirement Scheme allows both Singaporeans and foreigners working in Singapore to save on taxes today while helping them to better prepare for retirement tomorrow. However, the latter can only happen if you were to invest your SRS funds, rather than let it sit in your SRS account.
Platforms like Endowus allow you to start a Regular Savings Plan to invest your SRS monies cost-effectively. Whether it a lump sum single investment, or monthly recurring investment, you pay the same 0.4% in total fees – with no foreign exchange charges, no sales charges, and no hidden costs.
#3 You Will Receive A Boost In Your CPF Due To The Additional Wage Ceiling
A portion of your bonus will be subjected to CPF contribution by you and your employer. The Additional Wage Ceiling (“AWC”) is the maximum amount of annual wage subject to CPF contribution annually by the employer and employee. The formula is as follows:
$102,000 – Projected CPF Ordinary Wages Subject To CPF Contribution
Ordinary Wages generally refers to your monthly salary, of which only $6,000 each month is subject to CPF contribution.
Here’s an illustration of how much CPF contribution your bonus is subjected to, based on your monthly salary. In our example we assumed that salary is stagnant throughout the year:
|Mr X.||Mrs Y.||Mr Z.|
|Your Monthly Salary||$3,000||$7,000||$7,000|
|Amount of Bonus received||$9,000||$20,000||$40,000|
|Bonus subjected to CPF contribution||$9,000
Maximum bonus subjected to CPF ($102,000 – $6,000 * 12 = $30,000)
Table 1: Examples of bonus amounts subjected to CPF
Table 2: CPF Allocation rates based on age
Do note that the bonus figures above are not inclusive of employer contribution. Multiply the CPF contribution figures with the relevant allocation ratios shown in Table 2 to find out how much you will get in your various CPF accounts. If Mr Z is below 35 years old, he will contribute 23% of $30,000, which is $6,900 into his CPF OA account.
Stretch Your Cash Bonuses
One-off bounties like bonuses are great, but disciplined planning will allow you to benefit from it beyond this month and calendar year.
With a better understanding of the financial implications of your bonuses, you can begin to take action to optimise your finances and start investing towards your financial goals. If you’re interested, you can also learn more about Endowus’ CPF or SRS investment offerings.
Invest Better With Endowus
If you’re interested to start investing with Endowus, you’ll be happy to know that DollarsAndSense readers can have their first $10,000 managed for free for 6 months, which translates to savings of $20 in fees. Sign-up using this link to claim this special offer. Terms & Conditions apply.