Compliance

The R1.8m Threshold: What Changes in 2026/27?

An analysis of the new underestimation penalty brackets and how they impact provisional taxpayers earning above the threshold.

What Paragraph 20 Actually Does

Most provisional taxpayers focus on whether they've paid enough tax. Paragraph 20 of the Fourth Schedule to the Income Tax Act adds a second test: did they estimate accurately enough?

The provision allows SARS to impose a penalty not merely for underpaying, but specifically for underestimating. If your second-period IRP6 estimate of taxable income falls below the required minimum, a penalty of 20% of the shortfall in tax applies: the difference between the normal tax on the required minimum estimate and the tax on your actual estimate.

This matters because the penalty is automatic. SARS does not need to allege bad faith, negligence, or an intention to understate. If the numbers trigger the provision, the penalty follows. Understanding where the bracket lines fall is therefore not academic — it directly affects how carefully you need to estimate.

The New R1.8 Million Threshold for 2026/27

For years of assessment starting on or after 1 March 2026, Budget 2026 raised the paragraph 20 threshold from R1 million to R1,800,000. It is measured against your actual taxable income as finally assessed, and decides which test your February estimate must pass.

At or below R1.8 million, your estimate must be at least the lesser of 90% of actual taxable income and the basic amount (the figure pre-populated on your IRP6). In practice, an estimate at or above the basic amount is protected even if your year ran well ahead of it — and an honest estimate within 90% of actual is protected even if it is below the basic amount.

Above R1.8 million, your estimate must be at least 80% of actual taxable income, and the basic amount gives no protection. The penalty rate does not change — it is 20% of the shortfall in tax on either side of the line — but the safe harbour disappears, so an estimate anchored to last year's figures can trigger a meaningful charge.

The Threshold Applies to Total Taxable Income

A common error is to consider this threshold only in terms of freelance or consulting income. Paragraph 20 applies to your total taxable income for the year — employment income, consulting fees, rental income, interest, and any other sources all contribute.

This catches people who operate across multiple income streams without considering the combined picture. A contractor earning R700,000 in consulting fees might assume they are comfortably below R1.8 million — until they add their rental income, a part-time directorship fee, and an interest amount above the exempt threshold. The aggregate can push them into the stricter bracket, where their February estimate is now held to a higher standard.

Growth trajectories create the same exposure. A contractor who earned R1.3 million last year and had a strong first half of the current year may cross R1.8 million without expecting to. If their February IRP6 estimate is still based on prior-year figures, the shortfall in the stricter tier can be significant.

Why the Second Payment Is the Critical One

Paragraph 20 tests only the second-period estimate. The first payment, due 31 August, is a preliminary estimate made with about six months of trading data, and paragraph 20 does not test it.

The second payment, due 28 February, is different. Ten months of the tax year have passed. SARS expects your estimate to reflect a reasonably accurate view of your full-year income. This is where underestimation becomes expensive.

If your second payment estimate falls short by enough to trigger the provision, the penalty is 20% of the difference between the normal tax on the required minimum estimate and the tax on the estimate you submitted. For higher-earning contractors, this can represent a substantial addition to an already material tax bill.

The Optional Third Payment

The voluntary third payment, due 30 September after year-end, does not cancel a Paragraph 20 penalty that has already triggered on the second payment. What it does is reduce interest.

Interest on any underpaid balance runs from the date the second payment was due. The longer the shortfall remains outstanding, the more interest accrues against you. Making the third payment promptly once your actual income is known — typically after June or July, when trading figures for the year are clear — directly limits this exposure.

If you know by mid-year that your February estimate was conservative and you choose not to make the third payment, you will pay interest on the full shortfall from February through to your final assessment date. That is an avoidable cost.

Planning Around the Threshold

If your taxable income for the year is likely to fall anywhere in the R1.2m–R2.2m range, the bracket question deserves specific attention before your second IRP6 is submitted.

Build a realistic income projection before the end of February. Include all income sources — employment, consulting, rental, interest. Apply your expected deductions, including any retirement annuity contributions you plan to make before year-end. If the projection puts you near R1.8 million, model what happens if income comes in 15–20% above your central estimate. Understanding that downside scenario before submitting gives you the option to estimate more conservatively — or to make a higher payment.

Conservative estimation carries no cost if your income comes in lower. Any overpaid provisional tax is refunded after your annual assessment is finalised. Triggering Paragraph 20 does carry a cost, and it does so without warning.

Frequently asked questions

What is the Paragraph 20 underestimation penalty?

Paragraph 20 of the Fourth Schedule to the Income Tax Act imposes a penalty when a provisional taxpayer's second-period IRP6 estimate of taxable income is too low compared with actual taxable income. If your actual taxable income (as finally assessed) is R1.8 million or less, your second-period estimate must be at least the lesser of 90% of actual taxable income and the basic amount. Above R1.8 million, it must be at least 80% of actual taxable income, and the basic amount gives no protection. The penalty is 20% of the shortfall in tax. No audit or intent to evade is required for it to trigger.

How does the R1.8 million threshold affect my provisional tax penalty in 2026/27?

If actual taxable income is R1.8 million or less, the February estimate must be at least the lesser of 90% of actual taxable income and the basic amount — so an estimate at the basic amount is protected. Above R1.8 million, the estimate must be at least 80% of actual taxable income and the basic amount gives no protection. The threshold applies to total taxable income from all sources, not just freelance or consulting income.

Can I avoid the Paragraph 20 penalty after I've already underpaid?

Once the conditions are met at the second payment stage, the penalty cannot be reversed. However, making the optional third payment by 30 September reduces the interest that accrues on the underpaid balance between February and your final assessment. If you know by June that your second payment fell short, the third payment almost always reduces your total exposure.

Allan Lombard Chartered Accountant · Founder, InspiredTax

Allan has spent years working with South African provisional taxpayers and independent professionals. InspiredTax was built to make year-round tax planning accurate, private and genuinely usable between the two IRP6 deadlines.

This article is general guidance on South African tax practice, not tax advice for your circumstances, and InspiredTax is not affiliated with SARS. Verify figures against the current SARS tables before you file.

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