Relieving tax burden with pension contributions

BY: Hayford Amankwah
Mr Ken Ofori Atta
Mr Ken Ofori Atta

The recent announcement by the Minister of Finance, Mr Ken Ofori Atta, about the proposed tax changes has sent shivers down the spines of many Ghanaians.

The minister, in his mid-year budget review presentation to Parliament, proposed additional 35 per cent band to be included in the graduated Pay As You Earn (PAYE) system to essentially increase the tax burden on individuals earning more than GH¢10,000. The proposal, though yet to be approved by Parliament, has left many Ghanaians talking.

As noted by the minister, one major challenge that the country continues to face is low domestic revenue mobilisation and to address this, he proposed an additional tax band to increase the tax obligations of high-income earners in Ghana as one of the numerous measures to be deployed to tackle revenue shortfalls.

Although a progressive-income tax assessment appears laudable, the populace must be sensitised to understand the reasons for this approach, in particular, why there is the need for more taxes to be paid on their higher earnings.


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Paying taxes in itself is obviously not something people, since the days of Matthew in the Bible, feel encouraged to do, or talk less of having to pay extra on your high earnings. To encourage people to honour their tax obligations and more importantly, have the urge to pay more, it is always important to introduce incentives aimed at achieving that objective, particularly, where such incentives achieve a social goal. It is for this reason that the National Pensions Act, 2008 (Act 766) as amended, expressly exempts pension contributions from taxation in view of the need to have adequate income security during retirement to alleviate old-age poverty.

Section 3 of Act 766 provides for 18.5 per cent of the basic salary of a worker to be mandatorily set aside to provide pension income for the worker when they retire from active work. Additionally, a worker may voluntarily contribute up to 16.5 per cent of their income into a registered Provident Fund (PF) or a Personal Pension Scheme to supplement retirement income.

These contributions by, and on behalf of the worker, qualify for tax reliefs for the worker or his/her employer to the extent of the contribution made by either the employer or the worker. The tax relief on pension contribution can substantially reduce the tax burden of a worker and, therefore, Ghanaians should take advantage of the provisions of Act 766 and contribute more towards their retirement.

Current arrangements

Under the current tax arrangements, a worker earning say GH¢20,000 as basic salary and GH¢10,000 as allowance can make extra tax savings of GH¢1,237.50 (representing 25 per cent of GH¢4,950 contribution to a PF) if he makes an additional voluntary contribution of 16.5 per cent of his/her income alone to a registered PF.

Extending this to the new proposal by the Finance Minister means extra tax saving of GH¢1,732.50 (representing 35per cent of the GH¢4,950 contribution to the PF) can be made by this worker when the proposal is approved by Parliament.

On the basis of the above illustration, it is of prudential benefit to workers earning in excess of GH¢10,000 to take the relevant steps to identify a registered PF and make the necessary pension contributions.

Although Act 766 opens this window of opportunity for workers, the Ghana Revenue Authority (GRA) must, as a matter of urgency, come up with the relevant guidelines to ensure that this opportunity is not abused. Under Act 766, a worker, having retired or contributed to the fund for more than 10 years, can cash out his/her accrued benefit under the PF without suffering any tax. Act 766, however, mandates GRA to apply a tax on the accrued benefits that are cashed out prior to the 10 years.


Currently the GRA applies a flat rate of 15 per cent on such early withdrawals. Therefore, if the proposal from the Finance Minister is approved by Parliament, we can potentially have a situation where a worker, earning in excess of GH¢10,000, avoids paying tax at 35 per cent with contribution to a PF and then cashes out at a tax rate of 15 per cent if he or she so desires.

From the illustration above, a worker earning in excess of GH¢10,000 can avoid paying a tax of GH¢1,732.5 and instead pay GH¢742.50 if he/she chooses to contribute to a PF and then cash out immediately. This is a loophole that needs to be addressed immediately to prevent workers from avoiding to pay the appropriate tax.

The writer is the Manager, Standards & Compliance
National Pensions Regulatory Authority (NPRA)
Writer’s email: This email address is being protected from spambots. You need JavaScript enabled to view it.