How to make your tax refund work harder

Who doesn’t love that little ping telling you SARS has just paid your tax refund into your account? Suddenly, Mauritius is calling, and you can already hear the clinking of ice in your cocktail… After a long year of watching every rand barely touch sides, your tax refund feels like a little financial gift arriving at exactly the right time.

But it’s not a bonus, and according to Marnus Mostert, franchise principal and financial adviser at Consult by Momentum, seeing it that way could make you more likely to fritter it away instead of using it to help create lasting financial security.

Also see: Transform your tax refund into an investment opportunity 

Instead, see your tax refund for what it is: your money being returned to you. Perhaps your medical aid credits or retirement annuity contributions weren’t fully accounted for, and now SARS is simply paying back the difference. Your tax refund is not “extra” cash; it was yours all along – and like the rest of your hard-earned money, it should help you build future security.

Before you start mentally spending your tax refund, pause and ask yourself four questions: What is the most expensive money on my balance sheet? What happens if something goes wrong next month? Am I leaving valuable tax breaks on the table? What do I want this money to do?

Once you’ve answered those questions, there are three areas worth considering:

1. Take the pressure off your debt

If expensive debt is eating into your monthly budget and stress levels, your refund could help you get ahead. Putting extra money towards what you owe can reduce the interest you pay and free up more of your income over time.

The key is to tackle your debt strategically, prioritising which high-interest accounts to pay off first and snowballing those freed-up payments into the next account. You could also start by paying off the smallest balance first – every account you close makes the next one fall faster.

Here’s what this could look like in practice.

Take someone with R2.75 million in debt: a R2 million bond at 10% interest, R650,000 in vehicle finance at 11% and a R100,000 personal
loan at 18%. Their minimum repayments likely total around R35,972 per month. If they put an extra R3,833 a month – equivalent to a R46,000 annual tax refund – towards their debt, they could potentially save R1.5 million in interest and become debt-free around a decade sooner, using the debt snowball approach made famous by Dave Ramsey.

2. Put your refund towards retirement

Your future self can also benefit from today’s refund. Putting your refund into a retirement annuity gives it years to grow and compound, while a tax-free savings account offers another way to build wealth over time.

Thanks to the unofficial eighth wonder of the world – compound interest – a refund that feels modest today can grow into something far more substantial if you keep investing it year after year.

The real opportunity lies in creating a financial “loop.” When you contribute to a retirement annuity, SARS refunds a portion of that contribution. Reinvesting that refund back into the same retirement annuity increases your contribution, which generates a larger tax saving the following year, creating a cycle that builds wealth over time.

The numbers show just how powerful that can be: Say you contribute R46,000 a year to a retirement annuity from age 33 to 65. Since those contributions are tax-deductible, SARS refunds a portion based on your marginal tax rate.

Assuming a 9% annual return after charges and a 45% marginal tax rate, if you spend that refund each year rather than reinvesting it, you could retire with roughly R7.91 million. Reinvest it into the same retirement annuity every year, and that figure rises to R13.63 million.

Also see: How women can put themselves on their financial priority list

A tax-free savings account works differently. You don’t get a tax deduction when you contribute, but you pay no tax on interest, dividends or capital gains, and nothing when you withdraw. For a 33-year-old investing the R46,000 annual limit until they reach the R500,000 lifetime cap, that money could grow to roughly R4.38 million by age 65. The same contributions in an ordinary taxable investment could reach around R3.31 million.

That doesn’t mean an ordinary investment should be overlooked. While it doesn’t offer the same upfront tax advantages, it provides flexibility and can still be managed tax-efficiently by making deliberate use of annual interest exemptions and capital gains exclusions. Remember, tax efficiency isn’t only about where you invest, but how you manage the investment over time.

3. Build an emergency fund

Life has a habit of springing surprises just when you think you’re getting ahead. The burst geyser. The car that suddenly needs an expensive repair. Your kid making the team that’s going on an overseas sports tour. An emergency fund gives you something to fall back on when an unexpected bill arrives, helping you cover it without adding to your debt.

You don’t necessarily have to choose between these three options – they can also work together. Think of it as a waterfall: your retirement annuity generates the tax refund. That refund can help fund a tax-free savings account. Once you’ve reached its limits, additional money can flow into a discretionary investment or be used to pay down debt.

Where you enter that waterfall depends entirely on your own financial position. Someone with expensive debt and no emergency savings will have very different priorities to someone who is already debt-free and focused on retirement planning.

Age, your marginal tax rate, how long you can leave the money invested and whether you might need access to it all affect your decision. Two people with the same income and the same refund could make completely different choices because their financial circumstances are different. The work is in the weighing up, and a financial adviser can help you decide where the money could make the biggest difference in your life.

The smartest move may be deciding what to do with your refund before that happy SMS from your bank arrives. If you wait until the money is sitting in your account, temptation usually wins. Make the decision when you file your return and give the money a job before it even lands.

The money landing in your account this tax season isn’t a windfall – but it can create a waterfall.

Also see: Tax season checklist: Documents you should have ready

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