Guest ContributorThe reduction of EPF contribution rate which was announced during the recent 2016 budget’s recalibration will take effect beginning this March 2016 until December 2017.
Following the reduced rate of 3%, the EPF contribution rate will now change from 11% to 8% for 2 years. The reduction rate will however only be applicable for employee’s contribution. Employer’s contribution will remain at the current rate of 12% for employees earning above RM5,000 and 13% for employees earning below RM5,000.
The move is in line with the 11 key measures to stimulate the country’s economy and to increase private consumption expenditure by RM8 billion. This is to encourage consumer spending which will aid Malaysia’s economic growth during the current global economic slowdown but how will it effect the people in the long term?
You May Have To Pay More Taxes
Malaysians who choose to reduce their EPF contribution to the reduced rate of 8% may have to pay more income tax. This is because they will have more take home pay, which then translates to having more taxable income. The RM6,000 tax relief for EPF is still applicable, but it will be calculated by adding the total EPF deductions and life insurance for this year.
A person earning RM5,000, who opts for the reduced 8% rate, will have EPF monthly deductions of RM400 instead of RM550. This means the tax relief you get for EPF would be RM4,800 (400 x 12).
The maximum tax relief for EPF and life insurance is RM6,000. The less money a person contribute to EPF will result in a lesser tax relief. This results to paying more tax as explained below:
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Below is the comparison to show how a person could potentially be paying more income tax, assuming you are a single individual.
The Long-Term Effects
Tax relief of up to RM2,000 was also announced during the budget recalibration for those earning RM8,000 or less per month but it should be noted that this tax relief is only for the 2015 assessment year. So, there is no guarantee that it will also be available for the future.
According to EPF, only 23% of their members aged 55 have the recommended minimum savings level of RM196,000. Reports suggest that most Malaysians won’t even have enough money to ensure they live above the poverty line when they retire and about 80% of those retiring at the age of 55 will have to survive a poorer lifestyle upon retirement. Even at the 11% contribution rate so an 8% EPF contribution rate would definitely not help increase their retirement savings.
Those who opt for the reduced rate may have a little bit more take home pay for now by risking the comfort of their retirement by losing out from getting dividends from EPF for the amount they take out.
This article is a contribution from CompareHero. For more information and money saving tips, visit www.CompareHero.my
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