“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 could be liable for a lump sum payment of taxes of up to 45% (maximum rate per tax tables) 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.
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.
- Regular monthly income = R10,000.
- Annual equivalent = R10,000 x 12 = R120,000.
- Tax calculated on R120,000 as per tax tables = R5,886.
- PAYE payable on regular monthly income = R5,886/12 = R490.50 p.m.
In cases where an employer pays certain things like medical aid, pension fund 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
- 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.
These need to be as accurate as possible as even though PAYE is deducted monthly on the travel allowance, the travel claims need to be substantiated when the individual completes their annual return. Should the required information not be available, SARS could disallow the total travel claim and the shortfall of PAYE withheld will be payable by the individual taxpayer.
- 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.
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.
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.
Should you require our advice or assistance in this regard, reach out to our team of Tax professionals. Send an email to firstname.lastname@example.org or call us on 021 405 8500.
For additional reading:
More information on the proposed tax law amendment that could see tax mistakes result in prison time, can be read here.
The Tax Administration Laws Amendment Bill 2020 can be downloaded from Sabinet Law here.
The article is a general information sheet and should not be used or relied upon 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 financial adviser for specific and detailed advice.