From young, kids in Singapore have been brought up with the lesson that hard work pays off. The more you work, the better off you and your family would be – right?
It might sound weird, but it is possible to find instances where it does not pay to work, thanks to the way reliefs work in Singapore’s tax system.
Scenario 1: Student Earns More Than $4,000 In A Year From Working And Has A Parent With Above Average Income
According to the Inland Revenue Authority of Singapore (IRAS), if a student is studying full-time at any university, college or other educational institution and does not have an annual income exceeding $4,000, parents can claim the Qualifying Child Relief and Working Mother’s Child Relief.
The Working Mother’s Child Relief is one of the most generous tax deductions available, aimed to encourage mothers to continue to stay in the workforce. The Qualifying Child Relief can be claimed only once, by either parent.
So if a student makes more than $4,000 in a year, their parents will no longer qualify for the Working Mother’s Child Relief (WMCR) and Qualifying Child Relief (QCR). We illustrate the math in the following examples.
Siti is the only child in her family and she just graduated from Junior College last year. She plans to work part-time before she starts university in August. Siti’s mother has an annual income of $80,000, while Siti’s father has an annual income of $70,000.
Under the WMCR, for the first child 15% of the income of Siti’s mother is tax-free:
Reduction in Taxable Income = $80,000 * 15% = $12,000
At the $80,000 mark, the marginal tax rate is 7%.
WMCR Tax Savings = $12,000 * 7% = $840
If Siti’s father claims the QCR:
Reduction in Taxable Income = $4,000
At the $70,000 mark, the marginal tax rate is 7%
QCR Tax Savings = $4,000 * 7% = $280
Total Tax Savings = $840 + $280 = $1,120
To take things in perspective, if Siti earns more than $4,000 in the year, her family will lose their tax savings of $1,120!
This means that if Siti earned $1,000 a month, her family would continue to keep these tax savings if she worked for four months, as she made $4,000. However, if Siti worked for one more month, her income grows to $5,000 for the year, and her family must pay $1,120 more in income tax.
This means that Siti’s family suffered a net loss of $120 if she worked for the 5th month, compared to not doing anything that month. Note that tax savings for her parents can be even higher if the working mother has a much higher income or if Siti was a second child or later.
Let’s see what happens if Siti’s mother makes $200,000 per year, while Siti’s dad makes the same income of $70,000, ceteris paribus (all other factors being equal):
Reduction in Taxable Income = $200,000 * 15% = $30,000
At $200,000, the marginal tax rate is 18%.
WMCR Tax Savings = $30,000 * 18% = $5,400
At this stage, Siti’s mother can choose to claim the QCR instead since she is in a higher tax bracket:
QCR Tax Savings = $4,000 * 18% = $720
Total Tax Savings = $5,400 + $720 = $6,120
If Siti makes more than $4,000, her family will be paying $6,120 more in income tax due to the loss of reliefs. Her family would have been financially better off by $1,120, if Siti had chosen to stay home for the entire holiday with $0 income, compared to her Siti working to earn $5,000 in pocket money.
The only way to avoid paying more is for middle to upper income families with children pursuing full-time studies to look out for the $4,000 annual income ceiling when performing internships or part-time work. Most university summer internships are about 3 months, which means that at the market rate of $800 to $1,200 per month, students won’t exceed this income limit – unless they are one of those investment banking interns who make between $8,000 to $10,000 a month.
Scenario 2: Elderly Parent Working Part-Time With Children Who Are High-Income Working Adults
For older workers who work part-time, there are generous top-ups available from Workfare which augments their income. At the same hourly pay as a younger part-timer, they will hit the $4,000 annual income limit sooner.
The parent relief available is $5,500 if your parent does not live with you, and $9,000 if they do. If you’re an older parent doing part-time work occasionally to pass time, your high-income working children might be missing out on some substantial tax reliefs.
William is a senior aged 67 who retired two years ago. With no income and bored at home and, he is thinking of doing some part-time work to pass his time. William has one son and they live together. His son’s income is $200,000 a year.
Reduction of Taxable Income = $9,000
At $200,000, the marginal tax rate is 18%.
Tax Savings = $9,000 * 18% = $1,620.
If William earns up to $4,000 for the year, his family keeps the $1,620 tax savings. However, if William earns $4,001 or more, the income tax bill for his son next year will rise by $1,620.
While the government has actively encouraged senior workers to stay employed, in this scenario, it may be worth it for you to work and earn less, if you think you are about to exceed the $4,000 limit just by a small amount.
Put Time Saved Working Less Into Good Use
With a relatively low income tax rate compared to most developed countries, Singapore’s tax model strongly incentivises individuals in most cases to work more and harder by allowing people to keep most of their hard-earned money.
However, the exceptions above show that it does not always pay to work. Beyond the tax savings, work-related expenses means that your actual income gained is even less.
Of course, it doesn’t pay to work more only applies when you see things on the level of the family. From an individual level, either as a student or a parent, you may not want to be dependent on your family for allowance, even if that allowance comes from tax savings you ‘helped’ your family save on by not working.
For students, working is a good character-building endeavour that allows you to build networks and pick up new skills. For older Singaporeans, working allows them to keep engaged socially and is a good way to maintain their health. These benefits may be far more valuable than mere tax savings.
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