A BASIC GUIDE TO PAYE AND FOUR COMMON MISTAKES

by | Sep 13, 2021 | Tax

A BASIC GUIDE TO PAYE AND FOUR COMMON MISTAKES

Written by Bernard Schoeman on 28 April 2021.

 

“THE POINT TO REMEMBER IS THAT WHAT THE GOVERNMENT GIVES IT MUST FIRST TAKE AWAY” JOHN S. COLEMAN

If it weren’t for the PAYE system, which forces employees to pay taxes as they earn their money, each of us would be liable for a lump sum payment of between 18% and 45% of our total monthly earnings at the end of each tax year. Pay As You Earn (PAYE) requires that employers deduct money from their employees’ earnings as they earn it, and pay this money over to SARS on the employees’ behalf.

 

The Basics

To calculate PAYE an employer should multiply an employee’s taxable earnings (which include any fringe benefits such as Disability Benefit Contributions etc.) by 52 weeks, 26 weeks or 12 months (depending on how often they get paid) to get an annual amount. This annual sum is then cross-referenced against the SARS tax tables to calculate annual tax. This is then divided again by the same work period to get the monthly PAYE tax which is then withheld, displayed on your IRP5 and paid over to SARS.

Example:

  1. Regular monthly income = R10,000.
  2. Annual equivalent = R10,000 x 12 = R120,000.
  3. Tax calculated on R120,000 as per tax tables = R5,886.
  4. PAYE payable on regular monthly income = R5,886/12 = R490.50 p.m.

2022 tax year (1 March 2021 – 28 February 2022)

​Taxable income (R) ​Rates of tax (R)
1 – 216 200 18% of taxable income
216 201 – 337 800 38 916 + 26% of taxable income above 216 200
337 801 – 467 500 70 532 + 31% of taxable income above 337 800
467 501 – 613 600 110 739 + 36% of taxable income above 467 500
613 601 – 782 200 163 335 + 39% of taxable income above 613 600
782 201 – 1 656 600 229 089  + 41% of taxable income above 782 200
1 656 601 and above 587 593 + 45% of taxable income above 1 656 600

In cases where an employer pays certain things like medical aid, pension fund, income protection and/or retirement annuity fund contributions on an employee’s behalf, the employer must deduct these costs from the employee’s earnings and take these deductions/credits into account when calculating PAYE and making payment to SARS.  This is where problems begin to creep into the system.

 

Four Common Problems
        1. Travel Costs  Travel costs are a common area of concern for SARS as they can be miscalculated extremely easily. To determine the portion of the travel allowance that should be included in the calculation of an employee’s taxable income, so as to determine the PAYE, the employer is required to implement an 80/20 rule. Either 80% of their mileage is for business purposes, and the remaining 20% of the allowance is subject to tax. Or, only 20% of their travel is business related, and the remaining 80% of the allowance must be taxed. To determine the percentage to be included in taxable income, accurate logbooks must be provided by employees so that the appropriate 80/20 rule can be strictly adhered to.
          Choosing the wrong rate here can expose an employee to substantially more tax than they should be paying.
      2. Disability Benefit Contributions     Prior to 1 March 2015 Disability Benefit Contributions could be deducted tax free from an employee’s salary thereby reducing their PAYE contribution. Tax was then charged on the pay-out that the employee received in the event of a disability. This changed in March of that year, however, and now the Disability Benefit Contributions are no longer tax deductible and must be counted as being part of the employee’s fringe benefits. The final Disability pay-outs are, fortunately, tax free.
    2. Retirement payments    Retirement payments give rise to another common error in the calculation of PAYE, mainly due to the fact that people are unaware that the system changed, and they are still implementing the old system. As of 1 March 2016, SARS now considers all company contributions to an employee’s retirement and risk benefits as a fringe benefit which should be taxed.There are, however, instances in which a pension fund contribution may be tax deductible. This depends primarily on whether the pension fund is “approved” or “unapproved”. Whether a retirement benefit is “approved” or “unapproved” is determined by the way its associated fund is administered as well as the rules of the fund. The broker who administers the fund will be able to tell you whether it is approved or unapproved and it will then be easier to work out just how to treat those deductions for PAYE.
  2. Partial tax year      Because PAYE taxes are calculated on a projected annual earning, those employees who work only part of a year are liable to benefit from a rebate. Effectively a person earning R30 000 a month would pay monthly PAYE based on an annual earning of R360 000 a year. If they only work for six months of that tax year they should then have only been charged for an annual tax earning of R180 000 and will be deserving of a rebate for the six months where they paid too much.

Speak to your accountant for detailed advice. 

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

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Luke Victor

BA(SA), ICB Financial Accountant
The Tax Shop Alberton

More about Luke Victor

Luke obtained a diploma as a Financial Accountant with ICB and is a registered member of SAIBA with relevant experience. He also has experience working in IT and Software Testing and Training.

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