What is PAYE (Pay As You Earn)?

PAYE stands for Pay-As-You-Earn. It is a withholding tax on taxable incomes of employees. Under this system, an employer is required by law to deduct income tax from an employee’s taxable salary or wages.

Employees’ tax, which comprises of Pay-As-You-Earn (PAYE) and Standard Income Tax on Employees (SITE), refers to the tax required to be deducted by an employer from an employee’s remuneration paid or payable and must register for PAYE with SARS. PAYE must be deducted from the employee’s income and paid over to SARS monthly. The SITE element is not applicable with effect from 1 March 2012. The process of deducting or withholding tax from remuneration as it is earned by an employee is commonly referred to as PAYE.

Who Needs To Pay PAYE?

When you earn a salary or commission from your employer – your employer is obliged to deduct tax from you monthly. This is based on how much you earn and whether you receive fringe benefits or not. Thus the name “pay-as-you-earn”. The amount you pay is not necessarily your final liability. I you earn more than R120 000 per year or if you have more than one income or have your own business, you are required to submit two Provisional Tax Returns as well as an Annual Tax Return – at which point you will be assessed to ensure that there is no shortfall. You can also be entitled to a refund. This serves as a double check that your employer has been deducting the correct amount of tax where applicable. PAYE is a way for SARS to get their money on a monthly basis instead of waiting until the end of the year.

How and when should it be paid?

PAYE must be paid within seven days after the end of the month during which the amount was deducted. If the last day for payment falls on a public holiday or weekend, the payment must be made on the last business day prior to the public holiday or weekend.
The following payment methods are available:

eFiling
Electronic payments through the internet (EFT)
At a branch of one of the relevant approved banking institutions (ABSA, FNB, Nedbank or Standard Bank). Cheque payments may not exceed R500 000. This limit applies irrespective of the number of tax periods being paid, or should multiple cheque payments be made.
At a specific SARS branch, cheque payments may not exceed R100 000. This limit applies irrespective of the number of tax periods being paid, or should multiple cheque payments be made.

Employers who pay, or are likely to pay Employees’ Tax exceeding R10 million in any
12-month period, must submit Employees’ Tax declarations and make payments electronically.

Calculating PAYE

There are two standard methods for calculating employees’ tax which are acceptable to SARS.

Periodic
The periodic tax basis calculates tax on each payslip in isolation using the monthly tax tables.
Averaging / annual equivalent
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.

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). Where an employee is in non-standard employment or has received a tax directive from SARS, tax will not be calculated as mentioned above.

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PAYE Calculation Slab

2022 tax year (1 March 2021 – 28 February 2022) – See the changes from the previous year.

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/td>
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

2021 tax year (1 March 2020 – 28 February 2021)

Taxable income (R)	Rates of tax (R)
1 – 205 900	18% of taxable income
205 901 – 321 600	37 062 + 26% of taxable income above 205 900
321 601 – 445 100	67 144 + 31% of taxable income above 321 600
445 101 – 584 200	105 429 + 36% of taxable income above 445 100
584 201 – 744 800	155 505 + 39% of taxable income above 584 200
744 801 – 1 577 300	218 139 + 41% of taxable income above 744 800
1 577 301 and above	559 464 + 45% of taxable income above 1 577 300

Annual Equivalent Calculation

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.

If an employee was employed for a partial period, e.g. if their appointment date didn’t fall on the first day of the pay slip 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.

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 annualized whereas irregular income is not. In cases where an employee has both regular and irregular income, two annualization calculations must be performed:

Annualized regular income = YTD / Months Employed x 12
Annualized 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.

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

Fluctuating Income

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.

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

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

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