We have been redoing some of Medical Aid knowledge base articles lately, and have seen that the medical aid tax credit codes in Payroll might become a little confusing to a lot of users.  I am going to try and simplify this a bit in this post.

For an employee that is younger than 65, there is two codes that is to be used for the Medical aid tax credits:

• Code 8002 (Medical Aid Tax Credits)
• Code 8000 (Medical Aid tax Credits applied)

The biggest factor that confuses clients is that one transaction calculates a positive value, and the one transaction calculates a negative, and in the majority of the time the amounts that appears on both the codes is identical, that makes it appear that the one transaction just counters the other.  I am here to tell you that this is not the case.  Lets break down the codes to show you what I mean.

Code 8002: Medical Aid Tax Credits

• This code is the positive code.
• This code's main function is to take the number of beneficiaries loaded on the Masterfile, and then applies the Medical Scheme Fees Tax credit amounts to each of the beneficiaries in order to see the maximum allowable amount of tax credit that can be applied in this period.
• This code is set by default to not print on the payslip.
• This code is set by default to not affect the payslip (Won't, increase or decrease the Nett Pay or the deductions.

Code 8000: Medical Aid Tax Credits Applied

• This code is the negative code
• This code looks at the amount that displays on the code 8002 and the code 8001 and applies the lesser of the two amounts (As you can only deduct the Maximum amount of tax credits, or the total amount of PAYE, whichever is the LESSER amount)
• This code is set by default to print on the payslip
• This code is set by default to affect the payslip (Remember, a negative deduction becomes an income and will thus give the allowable credit back to the employee).

Essentially the  code 8002 is a "Ghost" transaction, that has no implication on your employees tax or payslip.  It is only there to work out the maximum allowable amount to be deducted for medical aid tax credits.

If you have an employee that is older than 65, there will be four Medical Aid Tax Credit transaction:

• Code 8002 (Medical Aid Tax Credits)
• Code 8000 (Medical Aid tax Credits applied)
• Code 8003 (Additional Medical Tax Credits)
• Code 8008 (Add. Med. Aid Tax Credit Appl.)

For an employee that is 65 or older, the codes 8000 and 8002 works in exactly the same way as discussed above. However, a person who is 65 years of age or older may claim the following as a Monthly Tax credit:

1. 33.3% of the fees paid to the medical scheme (Fringe Benefit and employee deduction) that exceeds 3 times the amount of the current Medical Aid tax credit (code 8002).
2. 33.3% of the qualifying medical expenses paid

Variable 1 is calculated on in payroll.  Variable 2 does not get taking into account for Payroll Purposes and the employee will be able to claim this when doing their individual return.

Code 8003 (Additional Medical Tax Credits)

• This code is the positive code.
• This code's main function is to calculate 33.3% of the Medical Scheme contribution that exceeds 3 times the amount of the current medical aid tax credit
• This code is set by default to not print on the payslip.
• This code is set by default to not affect the payslip (Won't, increase or decrease the Nett Pay or the deductions.

Code 8008 (Add. Med. Aid Tax Credit Appl.)

• This code is the negative code
• This code looks at the amount that displays on the code 8002 and the code 8001 and applies the lesser of the two amounts (As you can only deduct the Maximum amount of tax credits, or the total amount of PAYE, whichever is the LESSER amount)
• This code is set by default to print on the payslip
• This code is set by default to affect the payslip (Remember, a negative deduction becomes an income and will thus give the allowable credit back to the employee).

Essentially the  code 8003 is a "Ghost" transaction, that has no implication on your employees tax or payslip.  It is only there to work out the maximum allowable amount to be deducted for additional medical aid tax credits.

The last thing that you meed to know in regards to tax credits, is that on the Payslip it doesn't affect the PAYE transaction (8001), however, when you print the EMP201 the amount on 4102 will be equal to the code 8001 - 8000 (and in the case of an employee that is 65 years or older 8008 will also be deducted) to give you the amount of PAYE that includes the tax credits.  Please see below example:
Code 8001 = R1200
Code 8002 = R310
Code 8000 = - R310 (Negative R310)
 
The amount for PAYE on the EMP 201 for this employee will be R890.

If you have any questions or need a further explanation to any of the above, please feel free to ask.