What is PAYE (Pay As You Earn)?

There are two standard methods for calculating employees’ tax – periodic and averaging / annual equivalent – both of which are acceptable to SARS. These methods will be discussed with reference to monthly-paid employees but the principles are the same for employees who are paid weekly etc. The term “income” will be used in this article to refer to the employee’s taxable income (remuneration for PAYE purposes).

• The periodic tax basis calculates tax on each payslip in isolation using the monthly tax tables.
  • This method is not supported by SimplePay.
• Tax averaging takes into account an employee’s total income for the entire tax year to date (YTD) and uses an annual equivalent to calculate tax.
  • SimplePay uses this method as it provides the most accurate results, especially in cases of fluctuating income (please see below for more on this).

Where an employee is in non-standard employment or has received a tax directive from SARS, tax will not be calculated as mentioned above. Please see the following sections for more on each of these aspects:

• Non-Standard Employment
• Tax Directives – Other

The basic calculation involves working out an annual equivalent (annualising the YTD income) on which tax is calculated. This tax amount is then de-annualised to get the tax for the period employed. The annual equivalent is the projected amount of income that an employee would earn in a year based on their YTD income*. Effectively, this is the amount of income an employee would earn if their average monthly income for the YTD period was multiplied by 12.

For example, if an employee earns R10 000 per month in March and April and then R20 000 in May, their YTD income would be R40 000 (10 000 + 10 000 + 20 000) and the annual equivalent in May would be calculated as 40 000 / 3 x 12 = 160 000.

*Note: if an employee was employed for a partial period, e.g. if their appointment date didn’t fall on the first day of the payslip period, a pro-rata calculation will have to be performed to calculate their salary for that period. The salary for the partial period has to be added when calculating the YTD income; also, the portion of the period has to be added to the number of periods employed. For more information about the pro-rata calculation, please refer to the following article:

• Payroll Processing > Frequently Asked Questions > How does the pro-rata calculation work?

It is important to note that there are two types of income: regular and irregular. Regular income is anything that is paid at regular intervals such as salaries and commission; irregular income is anything that isn’t regular, such as an annual bonus. Regular income is annualised whereas irregular income is not. In cases where an employee has both regular and irregular income, two annualisation calculations must be performed:

• Annualised regular income = YTD  / Months Employed x 12
• Annualised total income = YTD  / Months Employed x 12 + irregular income

The tax is then calculated on each of these amounts and the difference between these two tax figures is the tax on the irregular income.

To get the tax for the relevant month, the annual tax on the regular income is worked back to its equivalent for the YTD period using the following calculation:

• Annual Tax / 12 x Months Employed

The tax on the irregular income, if any, is then added to this amount. This combined tax amount represents the total tax, for which the employee is liable up to this point in the year. Any tax paid to date, as well as any applicable medical aid tax credits, will be subtracted from this YTD liability to give the payslip tax. 

The actual calculation used on each employee’s payslip can be viewed by clicking on the Tax link for the relevant month to view the Tax Trace.

Example

If a monthly paid employee under 65 years old started working on 1 March 2018 and earned R10,000 in March and a sign-on bonus of R20,000, their tax would be calculated as follows:

Tax on Regular Income

• Year-to-date regular income = R10,000
• Annual equivalent = R10,000 x 12/1 = R120,000
• Tax calculated on R120,000 as per tax tables = R7,533
• PAYE payable on regular income = R7,533 x 1/12 = R627.75

Tax on Irregular Income

• Projected total remuneration = Annual equivalent of regular income + irregular income = R120,000 + R20,000 = R140,000
• Tax calculated on R140,000 as per tax tables = R11,133
• PAYE payable on irregular income = Tax on total income – Tax on regular income = R11,133 – R7,533 = R3,600

Total tax for the month

PAYE liability for March = PAYE on regular income + PAYE on irregular income – PAYE paid in previous months of the tax year = R627.75 + R3,600 – 0 = R4,227.75

Where an employee’s income fluctuates each month, their tax liability will obviously also fluctuate; however, the extent and impact of this fluctuation will differ depending on the tax calculation applied. Using the averaging calculation above generally ensures that they will have paid the correct amount of tax by the end of the tax year, even if their income fluctuates regularly / significantly.

The only possible exception to this is where an employee initially earned a large amount, which subsequently decreased and did not increase (significantly / at all) again. In this case, the employee may have overpaid their tax by the end of the year and will need to claim a refund from SARS by submitting a tax return. This is because employers may not grant tax refunds – where an employee has overpaid, their liability in subsequent months will simply be 0. 

In cases of fluctuating income, it is likely that the tax calculated on SimplePay will differ from what is in the monthly tables. It is also possible for tax to differ on payslips with the same amount of income if there has been a fluctuation at some stage in the tax year. Viewing the Tax Trace for a particular payslip is the best way to determine this.

Example

If a monthly paid employee under 65 years old started working on 1 March 2018 and earned R10,000 in March and R20,000 in April, their tax would be calculated as follows:

March:

• Year-to-date remuneration = R10,000
• Annual equivalent = R10,000 x 12/1 = R120,000
• Tax calculated on R120,000 as per tax tables = R7,533
• PAYE payable for March = R7,533 x 1/12 = R627.75

April:

• Year-to-date remuneration = R10,000 + R20,000 = R30,000
• Annual equivalent = R30,000 x 12/2 = R180,000
• Tax calculated on R180,000 as per tax tables = R18,333
• PAYE payable for April = R18,333 x 2/12 – R627.75 (previous tax paid) = R2,427.75