You will be able to explain how net trade income turns into a MediSave contribution amount.
The letter arrives in the second half of the year, and the figure on it is several thousand dollars. You check the date. It is about income you earned a year and a half ago, money you have long since spent on rent, a new laptop and a holiday. Many self-employed people meet their first MediSave notice this way, and the shock comes from the timing as much as the amount. Once you see how the figure is built, neither the timing nor the amount needs to surprise you again.
The contribution is worked out from your net trade income for the year. Net trade income is your gross trade income minus your allowable business expenses and capital allowances.
Gross trade income is everything you earned from your trade: all your fees, before anything comes off. Allowable business expenses are the costs you incurred to earn it, such as software, a business share of your phone bill and transport to clients. Capital allowances are how you claim the cost of equipment that lasts several years, such as a laptop or a camera, spread over time instead of claimed in one go. Lesson 4.2 sets out what counts in each group.
Here is Mei's last year, with figures made up for the example. Her gross trade income was S$61,600. Her business expenses and capital allowances came to S$3,600. Her net trade income was S$61,600 minus S$3,600, which is S$58,000.
The figure the CPF Board uses is your net trade income as assessed by IRAS. You declare your trade income and expenses in your income tax return. IRAS assesses it, and the CPF Board takes the assessed figure and works out your MediSave contribution from it.
This link has two consequences. First, accurate filing changes your MediSave bill. If you forget to claim allowable expenses, your net trade income is higher than it should be, and you pay more tax and more MediSave. If you overclaim, you risk penalties when IRAS checks. Second, you cannot settle MediSave on your own estimate in the way you might settle a utility bill. The amount follows the assessment, which is why the records habit in module 4 pays twice.
The CPF Board publishes a contribution table for self-employed persons. The rate depends on your age and on which income band your net trade income falls in. People with net trade income just above the threshold pay a lower rate, which rises as income goes up, until it reaches the full rate for their age group. The table also sets a ceiling on the income that contributions are counted on.
These rates are revised from time to time, so do not rely on a figure from an article or a friend. Open the current table on the CPF Board website and find the row for your age and the column for your income.
To finish Mei's example, suppose the table showed a rate of 9% for her age and income. That rate is made up for the example, so look up your own. Her estimated contribution would be S$58,000 multiplied by 9%, which is S$5,220. On her own, she might have guessed a few hundred dollars. Seeing the calculation explains the letter.
Follow the timeline. Mei earns her income from January to December. She files her tax return for that year in the following year, by the deadline IRAS sets. IRAS then issues her tax assessment, which can take some months. Only after that does the CPF Board work out her MediSave contribution and send the notice.
So money earned in early January can be billed well over a year later. The tax bill follows a similar path. If you spend as though each payment were entirely yours, both bills land on a version of you who no longer has the money.
The fix is the tax and MediSave pot from lesson 1.3. A share of every payment goes there on the day it arrives, so when the notices come, the money is waiting. Lesson 2.4 shows how to size that share from your own figures, and lesson 2.3 covers what to do when the notice arrives.
You can do Mei's calculation for your own last year in a few minutes. Find your net trade income: from your last notice of assessment if you have one, or from your invoices and expenses if you do not. Open the current table on the CPF Board website. Find your age group and the band your income falls in, read the rate or formula, and work out the amount.
If your income sits in one of the lower bands, the table may give a formula instead of a single rate. Follow it step by step and write down each line, so you can check your arithmetic later. If you are close to the threshold, note that too, because a small change in expenses could move you across 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 estimate last year's contribution from your own net trade income.
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