Explain how your net trade income becomes a MediSave contribution amount.
If you're self-employed in Singapore, MediSave is charged on your net trade income: a percentage of the figure IRAS assesses for the year. The CPF Board needs that assessment before it can calculate anything, so the bill reaches you long after the income came in.
For a lot of self-employed people, the first contact with MediSave is a letter in the second half of the year asking for several thousand dollars. The income it charges was earned roughly a year and a half before. In the meantime that money has usually been spent on rent, a new laptop or a holiday, and the late arrival is as much of a shock as the size of the sum.
Four figures go into net trade income. Gross trade income is the total you earned from the trade, all your fees, before anything is taken off. From it you subtract allowable business expenses, which are the costs you incurred in earning that income: software, the business portion of your phone bill, getting to and from clients. Then you subtract capital allowances, which cover equipment that lasts several years, like a laptop or a camera. You don't claim the full price in one year; the cost is spread over time. You also subtract any trade losses, as determined by IRAS. Lesson 4.2 goes through what belongs under each heading.
So the order is: start with gross trade income, then take off allowable business expenses, capital allowances and trade losses.
Mei is self-employed (an invented example, and all her figures are invented too). Last year she brought in S$61,600 in gross trade income. Her business expenses and capital allowances added up to S$3,600. S$61,600 minus S$3,600 = S$58,000, which is her net trade income. Using 9% as her rate (a made-up rate for this example; you need to look up your own), her estimated MediSave contribution is S$58,000 x 9% = S$5,220. Asked to guess without working it out, Mei might have said a few hundred dollars. Running the numbers explains the size of the letter she gets.
Four things happen in sequence before a notice reaches you. You put your trade income and expenses into your income tax return. IRAS assesses your net trade income. The CPF Board uses that assessed figure to calculate your MediSave contribution, and then it sends you the notice.
Follow Mei through a year. She earns from January to December. The following year she files her return by the IRAS deadline. Her assessment from IRAS can take some months to come out, and the CPF Board only calculates her MediSave and sends the notice once it has. Money she earned in early January may be billed well over a year after she was paid. Her tax bill travels a similar route.
Since the CPF Board works from the net trade income IRAS has assessed, your filing feeds straight into the MediSave figure. Leave out allowable expenses and your net trade income is overstated, which raises both your tax and your MediSave. Claiming more than you're entitled to carries its own risk, as you can face penalties if IRAS checks. The link also means you can't pay MediSave on a figure you've estimated yourself, as you might with a utility bill; the amount comes from the IRAS assessment. Keeping good records, the habit built in module 4, reduces your tax and your MediSave at the same time.
The CPF Board publishes a contribution table for self-employed persons. Two things decide your rate: your age, and which income band your net trade income sits in. Just above the threshold, a lower rate applies. As income goes up, so does the rate, until it reaches the full rate for your age group. The table also sets a ceiling, and income above it is not counted for contributions. In some of the lower bands you'll find a formula where you might expect a single rate. The CPF Board revises rates from time to time, so a figure you read in an article or heard from a friend may be out of date. Check the current table on the CPF Board website each time.
Estimating last year's contribution takes a few minutes:
Get your net trade income for last year, from your last notice of assessment or, if you don't have one, from your invoices and expenses. Pull up the current contribution table on the CPF Board website. Locate your age group and the income band that matches your net trade income. Read off the rate or formula where that row and column meet. Calculate the amount. With a formula, go one step at a time and write each line down, so the arithmetic can be checked later. If your figure sits near the threshold, make a note of it, as a small change in expenses could move you across it.
Tax and MediSave both reach you late. If you treat each payment as entirely yours to spend, both bills will land after the money has gone. To prevent this, use the tax and MediSave pot from lesson 1.3. On the day any payment comes in, move a share of it into the pot, so the money is waiting when the notices arrive. Lesson 2.4 shows how to work out that share from your own figures. When the MediSave notice does come, lesson 2.3 tells you what to do with it.
Your own net trade income for last year is the only input you need to bring, so have it ready before you open the CPF Board website.
Find the current MediSave contribution table on the CPF Board website and use your own net trade income to estimate last year's contribution.
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