As a self-employed person for almost 2 years now, I know the last thing that you want to worry about is paying taxes or CPF and locking up your hard earned cash into an account that only releases it back at the age of 55…
When I first decided to take the leap of faith and embrace the title of “self-employed“, there were a few burning questions on my mind when it came close to the year end.
- How much taxes do I have to pay every year?
- Do I have any mandatory CPF contributions?
- Should I make voluntary contributions to my CPF account? And how much should I put in?
The real answer to these questions lie in the numbers. Thankfully I actually graduated with a Bachelors degree in Accounting so at least that didn’t go to waste!
With slight dread, I pulled my old gigantic accounting textbooks out, wiped off the dust and prepared to dive in – and then realized that actually everything I needed could be found on the internet! More specifically – CPF’s website.
But I know you don’t have time to sift through mountains of information there, so I’ve gone ahead and done the heavy lifting!
This guide will provide all self-employed person with exactly what you need to know about CPF contributions. Later on, I’ll even show you exactly how much you should contribute in CPF to get the most tax savings!
I created a spreadsheet specifically for self-employed people to calculate their tax obligations as well as compare different levels of voluntary CPF contributions to decide how much to put in every year.
You can access it here: Self-Employed Tax Calculator
(Note: this spreadsheet is meant to help you estimate your tax obligations and savings based on how much reliefs you can get. It is not meant to represent the actual amount of tax obligations you will be subjected to.)
Types of CPF Contributions for Self-Employed Persons
As a self-employed person you basically only have two types of CPF contribution categories:
- Compulsory Medisave Contributions
- Voluntary CPF Contributions
1. Compulsory Medisave Contributions
All self-employed persons are required to make compulsory contributions to their medisave every year. The exact amount depends on your net trade income.
Here’s the exact rates taken from CPF website (accurate as of 23 October 2020).
An important point to note is that you can offset this medisave amount when you make voluntary contributions (we’ll cover that in the next part).
2. Voluntary CPF Contributions
In my first year of being self-employed, I didn’t really consider making any voluntary contributions to my CPF account. After all, why should I put my money into an account that I can’t withdraw from? Having more cash-on-hand beats locking them up in my CPF account right?
The truth is, it depends…
Why Should I Contribute More to CPF?
The short answer, to pay lesser taxes. Any voluntary CPF contributions made will add to the amount of CPF relief that you can receive which deducts from your chargeable income. The tax savings amount can be quite significant (especially as your chargeable income gets higher and higher).
The portion of your voluntary CPF contribution that goes into the Medisave Account (MA) will also offset your Medisave payable. This means that you not only reduce your taxes paid, but also your mandatory medisave obligation amount.
Benefits of Voluntary CPF Contributions 👍
- Enjoy CPF relief that reduces your chargeable income and hence tax payable
- Contributions that go into your MA account will offset from your mandatory Medisave contribution amount
- Enjoy high interest rates in your OA, SA and MA account
This is especially useful if you are planning to buy a house any time soon, since you can use your CPF contributions OA to pay for the house.
Voluntary CPF Allocation Ratios
Your voluntary CPF contributions are allocated based on pre-defined ratios that vary for different age groups. This means that you can’t directly choose which account you want your voluntary contributions to go into!
This table shows the ratio allocation to CPF accounts based on age:
| Employee’s Age (Years)* | OA | SA | MA |
|---|---|---|---|
| Below 35 | 62.17% | 16.21% | 21.62% |
| 35-45 | 56.77% | 18.91% | 24.32% |
| 45-50 | 51.36% | 21.62% | 27.02% |
| 50-55 | 40.55% | 31.08% | 28.37% |
| 55-60 | 46.16% | 13.46% | 40.38% |
| 60-65 | 21.22% | 15.15% | 63.63% |
| 6%+ | 8% | 8% | 8.40% |
*The table reads “employee’s age” because it uses the same one as prescribed for employee voluntary CPF contributions.
Let’s say you make a voluntary contribution of $10,000 and your age is below 35 years. The amount is split in the following manner – $6,217 to OA, $1,621 to SA and $2,162 to MA.
There is a cap to how much you can contribute into your CPF accounts. Your maximum voluntary CPF contribution allowed is capped at:
- 37% of your net trade income assessed, or
- $37,740
whichever is LOWER.
Calculate How Much Savings from Your CPF Contributions
I’ve created a document that will help you to estimate how much savings you will enjoy based on how much CPF contributions.
Major observations from the data:
- The higher your chargeable income, the more taxes you save when you contribute to CPF
- The more the amount of your CPF contribution, the lower the rate of savings / contribution
How to Use The Self-Employed Tax Calculator Sheet
There are a total of 4 tabs in the Google Sheets. Follow the instructions below to get the most out of this resource!
Step 1: Click this link to open the Google sheets
Step 2: Click on “File” > “Make a Copy” to create a duplicate that you can edit.
Step 3: In the “1. Tax Calculator” Tab, enter your estimated chargeable income for the year as well as all other tax reliefs.
You can leave the CPF relief blank for now and fill it up later after calculating your desired amount.
Step 4: Go to the “2. CPF Relief Calculation” Tab and to see how much tax savings you will receive for increasing amounts of voluntary contribution
Step 5: Once you have decided on the amount of voluntary contributions you want to make, go back to “1. Tax Calculator” and enter the amount in the CPF relief field
Step 6: Go to the “3. Voluntary Contribution Allocation” Tab to see the breakdown of your contributions across the different accounts
Select the correct age group to see the correct breakdown that corresponds to you.
Step 7: Go to the “4. Mandatory Medisave Contribution” Tab to see how much mandatory medisave contributions you have to pay based on your current voluntary contribution amount
Should I Make CPF Contributions?
Short answer – YES! Because of higher tax savings that you enjoy.
The actual amount to contribute would depend on your how much you can afford. Contributing a larger amount to CPF to save on taxes is ideal, however you also need to take into account several other important factors like:
- How much disposable income you have – remember you can’t withdraw from your CPF accounts so it’s best to only contribute what you can afford
- Your total assessable income – higher incomes will enjoy larger tax savings
Always remember to leave savings for yourself and any emergencies. You don’t want to squeeze yourself dry just to save on taxes and end up with nothing left for the next few months!
The way I see it, CPF is like an investment and one should always weigh the procs and cons before moving forward. Use the Tax Calculator sheet to calculate if it’s worth it for you to contribute more and decide which amount is ideal for you based on your needs!