You will be able to explain how chargeable income is worked out and why a relief is worth your marginal rate.
Singapore taxes the income you earned in a calendar year, then lets you subtract reliefs before the rates are applied. The year you are taxed in is called the year of assessment, and it is always the year after you earned the income. So the return you file this year covers what you earned last year.
The figure the rates apply to is your chargeable income. It is your assessable income, mainly your pay, bonuses and taxable benefits, minus deductions and minus your personal reliefs. Reliefs are amounts IRAS lets you subtract because of your circumstances: working, contributing to CPF, supporting parents, raising children, serving as an NSman and so on.
Resident tax rates are progressive. The first slice of chargeable income is taxed at zero, and the rate rises slice by slice as income goes up. Each rate applies only to the income inside its band. Earning one more dollar never pushes your whole income into a higher rate. Only that last dollar is taxed at the higher one. The bands and rates are set by the government and have been changed several times, so look up the current resident rate table on the IRAS website before you calculate anything.
That structure leads to the most useful idea in this course. A relief removes income from the top of your stack, the slice taxed at your highest rate. So a relief saves tax at your marginal rate, not at your average rate. Your average rate is total tax divided by income, and it is always lower.
Take example figures. Suppose your top slice of income is taxed at 10 percent. A $1,000 relief then saves you $100. Your colleague's top slice is taxed at 5 percent, so the same $1,000 relief saves her $50. The relief is the same, but it is worth twice as much to you. This is why the value of SRS contributions, CPF top-ups and shared family reliefs depends on who claims them, and why the same advice can be good for one person and pointless for another.
There is a ceiling that overrides all of this. IRAS caps the total personal reliefs you can claim in one year of assessment. Once your reliefs reach the cap, the next relief is worth nothing. For most people the cap is far away. For higher earners with children, parents and voluntary contributions, it can come into play, and it changes which reliefs are worth chasing. Module 3 covers how to check where you stand.
Which rules apply to you depends on your tax residency. Singapore citizens and permanent residents who live here are tax residents. Foreigners become residents for a year if they stay or work here long enough to meet IRAS's tests. Residents pay the progressive rates and can claim reliefs. Non-residents are taxed differently and generally cannot claim reliefs. This course assumes you are a tax resident, and lesson 1.2 explains the tests if you are not sure.
You can see all of this on your own notice of assessment. It shows your income, each relief you received, your chargeable income and the tax payable. If you have never traced it line by line, the module on the notice of assessment in Read the fine print: payslips, statements, policies and contracts walks through it.
For this lesson, log in to your IRAS account with Singpass and find your last notice of assessment. Write down your chargeable income. Then open the current resident rate table on the IRAS website, find the band your last dollar falls into, and write down your marginal rate. Every relief decision in the rest of the course uses that number.
Find your chargeable income on your last notice of assessment and use the current IRAS rate table to write your marginal rate.
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