Fringe Benefit Tax Treatment of Medical Insurance Subsidies in Payroll

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Fringe Benefit Tax Treatment of Medical Insurance Subsidies in Payroll

• 02 July 2025
• Tax Administration
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 29 February 2026.

Question:

A monthly subsidy of R1,500 will be provided to employees who submit proof of medical insurance, effective 1 July. Guidance is sought on how this subsidy should be reflected on employee payslips, whether it necessitates two entries (income and fringe benefit), and which IRP5 source codes are appropriate for SARS reporting.

Answer:

The Problem / Facts

A monthly subsidy of R1,500 will be provided to employees who submit proof of medical insurance, effective 1 July. Guidance is sought on how this subsidy should be reflected on employee payslips, whether it necessitates two entries (income and fringe benefit), and which IRP5 source codes are appropriate for SARS reporting.

Analysis of the Tax Issues Identified

List of Tax Issues with Relevant Sections of Legislation

 Classification of the Medical Subsidy as a Fringe Benefit

• Income Tax Act 58 of 1962, Section 1: Definition of "gross income".

• Income Tax Act 58 of 1962, Seventh Schedule, Paragraph 2(c): Addresses fringe benefits related to medical subsidies.

 Tax Treatment and Distinction Between Medical Insurance and Medical Aid

• Income Tax Act 58 of 1962, Section 6A: Medical scheme fees tax credit is only applicable to contributions made to registered medical aid schemes, and not to medical insurance.

 Payroll Implementation and Reporting (IRP5 Source Codes)

• SARS Guidelines and Interpretation Notes: Guidance on IRP5/IT3(a) codes, specifically Source Code 3801 for payroll reporting.

Applicable Law

• Income Tax Act 58 of 1962, Section 1: Includes fringe benefits in the definition of gross income.

• Seventh Schedule, Paragraph 2(c): Treats employer subsidies for medical-related benefits as taxable fringe benefits.

• Section 6A: Governs the medical scheme fees tax credit, which does not apply to medical insurance.

• SARS Guidelines: Provide IRP5 source codes; Code 3801 applies to general taxable fringe benefits.

Application of the Law to the Facts

The R1,500 monthly subsidy qualifies as a taxable fringe benefit in terms of Paragraph 2(c) of the Seventh Schedule to the Income Tax Act, as it is provided by the employer in respect of employment. Since the subsidy relates to medical insurance rather than a registered medical aid scheme, employees are not eligible for the medical scheme fees tax credit under Section 6A.

On the payroll system, the subsidy should be reflected as a taxable fringe benefit using IRP5 Source Code 3801 (Taxable Fringe Benefit – General Benefits). Despite its general label, this code is appropriate for employer-paid medical-related benefits, including those for medical insurance.

There is no need for a second payslip entry as income; it should be reported solely as a fringe benefit. PAYE must be withheld on the full taxable income, inclusive of this benefit.

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