You will be able to set a monthly budget base that accounts for tax you will owe later.
Arjun's first year of work went well, he thought. He spent roughly what came in, saved a little and never went overdrawn. Then, in his second year, a letter from IRAS asked for a sum he did not have sitting anywhere. He ended up paying it in instalments from money he had planned to spend on a trip, and it took him months to feel back on track.
Nothing in his budget was wrong, exactly. It was built on the wrong starting number. This lesson sets the right one, so the first tax bill arrives as something you planned for. The figures are made-up examples.
The first rule is simple: plan your monthly budget from take-home pay, the amount that actually lands in your bank account, not from the salary in your contract.
Hui Min's contract says S$4,000. Her payslip, from lesson 2.1, Every line on your payslip, from gross pay to take-home, shows S$3,198 after her CPF contribution and her self-help group deduction. Her CPF is real money and it is hers, but it cannot pay for rent, food or a phone bill. A budget built on S$4,000 would plan to spend S$802 a month that never arrives.
If your take-home pay changes from month to month, because of overtime or allowances, use the lowest normal month as your base and treat anything above it as extra.
Lesson 2.1 showed that Singapore does not deduct income tax from a resident employee's monthly pay. Instead, IRAS assesses each year's income in the following year. You file, or your employer's records are passed to IRAS for you, and then you receive a notice of assessment with the amount due.
That timing is what caught Arjun. The tax on your first year's income is billed the year after you start work, and by then the money it relates to has already been paid to you and, quite possibly, spent. If you started work midway through a year, your income for that first calendar year may be low enough that you owe little or nothing. Your first full year is when the bill becomes real.
So the money for next year's bill has to come out of this year's pay. The way to make that painless is to set a little aside every month.
You do not need to work out your tax by hand. IRAS publishes a tax calculator for resident employees on its website. Enter your expected income for the year, including any AWS or bonus, and the calculator applies the current rates and the reliefs you enter, such as relief for your own CPF contributions. There are other reliefs too, including one for supporting your parents if you meet its conditions, and IRAS lists them with their rules.
Hui Min expects S$52,000 for her first full year: S$4,000 a month for twelve months plus one month of AWS. Suppose the calculator estimates a bill of about S$600, a figure invented for this example. She divides it by 12 and sets aside S$50 a month. Her budget base becomes S$3,198 minus S$50, which is S$3,148.
When the real bill arrives, she can pay it from that set-aside. IRAS also lets you pay by GIRO in monthly instalments once you have been billed. Instalments spread the cost, but they only help if the money exists when each one is due. Setting it aside from the start does that job.
The last part of the base is what to leave out. The AWS and any bonus come once or twice a year, after CPF, and as lesson 1.2 showed, a bonus can be smaller than hoped or not come at all. If your monthly budget needs bonus money to balance, it does not balance.
So build the monthly plan on monthly pay alone. When a bonus or AWS lands, treat it as a decision to make on that day: some to savings, some to a goal, some to spend. Lesson 7.2, The raise rule: decide where the next increase goes before it arrives, gives you a rule for exactly that. Keeping bonuses out of the budget also keeps the tax set-aside honest, since your estimate already counts them as income.
Arjun has since set up his own monthly tax set-aside, sized from the calculator rather than from a guess. It is the most boring line in his budget, and the one he is happiest to have. Your own version starts with two numbers: your take-home pay and your estimated yearly bill.
Work out your monthly take-home pay and an estimated monthly tax set-aside using the IRAS calculator.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).