Incentives can be either cash-based or non-cash incentives. If we look at cash incentives then these can be in the form of a cash bonus. If the cash incentive is in the form of a bonus then it is taxable, yes it is taxable. From a tax perspective, a bonus is not a separately taxable item. It is considered as a part of the income. Therefore the tax rates that apply to a bonus as a cash incentive are the same rates that are applicable to your taxable income.

For example, if your annual taxable income is R100,000 then your income will be taxed at 18%. The amount of cash incentive that you received will also be taxed at the same rate of 18%. So, if you received a bonus of R5000 then you will be taxed R900 on the Bonus and so your net cash incentive will be R4100.

In other words, the tax bracket that applies to our salary will also apply to the bonus or cash incentive that you received.

 

 

What if the cash incentive falls in a higher income bracket?

Sometimes it may happen that the addition of cash incentive to income may take the taxable income to the next income bracket. If this happens then the portion of cash incentive or bonus that falls within the next income bracket gets taxed.

For instance, if your annual income is R190,000 and you receive a R10,000 cash incentive during the year. Then even though your annual income is within the 18% tax bracket but after adding the cash incentive your income now falls within the upper tier of 26% tax bracket. 

Your income will still be taxed at 18% as it is within the 18% tax bracket. But the cash incentive you received will now be taxed at two different rates. Cash incentive up to R5850 will be taxed at 18% whereas the remaining R4150 will be taxed at 26%.

Some employers will tax your bonus and the amount of cash incentive that you receive will be the tax deducted amount because employers have to file income tax deducted at source on behalf of the employees. Whereas some employers will tax you at higher rates throughout the year and pay you the full amount of cash incentive or bonus. There really isn`t any difference between the two approaches. Employers who tax at higher rates throughout the year do so only to make up for the tax on bonus so that when you receive your cash incentive you receive it in full.