So, you’re looking at moving into a new job or you’re about to start a new job and the excitement is real. Congratulations on this achievement – you have unlocked level 1 of adulting (that’s what the kids are calling responsibilities right?).
New adventure, new people (although mostly virtual right now), but most of all “new salary!”
You can see it now, your first (new) salary. Those morning double-shot lattes, Gucci shoes and Woolies pre-made meals. This. Is. Going. To. Be. Awesome.
Spoiler alert: you may be disappointed by the actual Rand amount which reaches your bank account – even after you negotiated a competitive remuneration package.
All the excitement dissipates as you find yourself somewhat shell shocked when you realise that the total amount you’re taking home differs substantially from the amount you assumed you’d be getting. Basically the job advertised for R240k/ year doesn’t end up with you having R20k in your pocket in each month.
This all boils down to not understanding the make-up of your salary and the terminology used when discussing your “cost to company” (CTC).
Secondary and Tertiary institutions may get you ready for the working world from a theory perspective, but they fall short on dealing with tax, salary structures and how to do VLOOKUP on an excel spreadsheet.
CTC is the total remuneration that an organisation pays an employee, of which the salary (cash portion) is just one component.
Your CTC vary from employer to employer, but they essentially contain the following:
- Contributions towards a pension or provident fund
- Group risk (life cover, income protection, severe illness etc.)
- Medical aid
- Gap cover
Furthermore, your CTC will also include:
- Pay-as-you-Earn (PAYE) taxation
- Standard-Income-Tax-on-Employees (SITE),
- leave and bonus allocations (and how these bonuses are paid, taxed and accrued)
Your CTC might be R20 000, but you need to be aware that the cash component might only be R17 000, where R3 000 goes towards items in the first bullet points.
On top of this, the R17 000 will be taxed at income tax tables, which means you will have a lower amount paid into your bank account.
Check out the income tax tables directly from SARS:
I will never forget my first salary of R3 000, and how bleak I was that although I wasn’t permanent yet, I only received R2 600.
Companies are responsible for deducting Pay-as-you-Earn (PAYE) tax and for making contributions to the Unemployment Insurance Fund (UIF) on behalf of you, the employee.
You need to understand how your net salary is made, so perhaps engage with the HR and interrogate a pro-forma salary slip. If HR don’t know the answers, they will be able to direct you to the experts responsible for the company’s benefits.
Once you have clarity on what your prospective employer offers, will you have a better idea of what choices you have in structuring your payslip. This includes options on which retirement savings investment strategy you are pooled in, and the level of your retirement fund contributions.
Do not be afraid to ask for a pro-forma salary slip on the basis that you are a full time employee. I recall my second job was a decent increase in my CTC. The first 3 months of probation were amazing, and then I became permanent. With that, came the group risk and provident fund deductions. I had just bought a car, and all of a sudden “things got real”.
The key to making good decisions, from early in a career, is to ask questions and get advice – regardless of how simple they may seem. Everyone has had a first payslip (including Karen living off the family trust) and it is only natural to question how your income is calculated. It is best to ask these questions when you start working, get clarity and professional advice, and in that way maximise your earnings and savings from a young age.
Frequently asked questions:
Q: Can I contribute less into my retirement fund through my employer?
A: The Afrikaans have a wonderful answer for this “Ja, nee.”. You can, as long as the rules set out in the fund allow this, and your employer has approved different contribution rates. If the lowest contribution rate is set at 5%, you cannot go lower than that.
Q: Should I opt for a 13th cheque or a performance bonus?
A: This is dependent on your personality and if your employer allows this. What I would suggest, if there is a 13th cheque, is that you ask HR if you can be taxed a little extra every month so when it pays out, you are not surprised by how little you get out.
Q: Can I contribute towards a different medical aid, other than my employer?
A: You can if you belong to your parents/partner/spouse’s medical aid and you can show proof. Many employers make it compulsory to be a part of their medical aid scheme unless you are on another as mentioned before. Some employers will ask for an annual confirmation to ensure you belong to a scheme.
Q: Do I have to be a part of my company’s group risk?
A: If you are a permanent employee, then the answer is almost always yes. The only times I have seen this not be the case are for contract workers or those who have reached retirement age but stay on as an employee.
Practical suggestions to stretching your income as a new employee:
- Living with parents for as long as possible. “While you may not like the idea of living with your parents when you earn your own money, this makes the most financial sense. Even if you contribute a marginal amount towards food and living costs, it will highly likely still be cheaper than renting accommodation.”
- Sharing accommodation for the first few years. “If you cannot (or won’t) live with your parents, the next best option is to share accommodation with other people, perhaps until you can afford a small place of your own.”
- Setting financial goals: “Alongside starting to save with your first salary, this is a useful financial habit to get into. Set yourself a goal of going on holiday, or buying a car – this will enable you to work towards something tangible, and it makes sacrifices easier.”
- Not splurging all your discretionary income: “It is tempting to buy the fancy car you have always dreamed of when you start working, but the novelty eventually wears off, while the payments stay with you. If you have to purchase a vehicle, opt for something modest and practical while you are young.”
- Investing from a young age. “This can be investing towards your retirement, or saving towards buying a property, even if you will lease the property. This is one of the best ways to compound your savings.”
- Getting professional financial advice from early in your career. “When speaking to your HR delegates, they are often able to point you towards financial advisors who are linked to the company’s benefits consultants to help you structure your retirement planning optimally for your circumstances.”