What is the Law on PAYE?

If there’s one truth in life, it’s this – Taxes are never simple. Many people around the world spend countless hours of their time trying to figure out how much money they have to pay to the government, while others simply bite the bullet and hire someone else to do it for them. For those individuals who try things themselves, the process is usually quite confusing and requires an understanding of the many different forms of tax that may or may not be applicable to any given person. One such kind of tax is known as PAYE and may have left you scratching your head trying to figure it all out. If that’s the case, perhaps we can help out by asking a few simple questions, such as – What is PAYE? Who does it apply to? And how does it all work? What is the Law on PAYE?

PAYE stands for Pay-As-You-Earn and is sometimes called Employees’ Tax. PAYE is a type of income tax that is paid to SARS by an employer on behalf of their employee. 

Simply put, to ensure that an employee’s income tax liability is consistently settled, their employer withholds the amount they owe from their salary each month and pays it to SARS in their place. 

What is the Law on PAYE?
What is the Law on PAYE?

As a result, employees will sometimes receive money back from SARS at the end of the year when too much money has been withheld. 

Who Must Pay PAYE in South Africa?

While the money itself comes from the salary of the employee, the payment is made by the employer after deducting the amount. 

Employers must register with SARS within 21 business days of becoming employers. That said, employers do not need to register if none of their employees is liable for normal tax. 

Is PAYE Compulsory in South Africa? 

Yes, it is compulsory when employers meet the aforementioned prerequisites.  

How Much Must You Earn Before Paying PAYE?

Similarly to income tax, a Tax Threshold applies in this situation which means that employees under the age of 65 making less than R91 250 per year will not be affected (this figure only applies for this year). 

Assuming you work 12 months in a year, this means that you will need to earn around R7 604 per month before you need to start paying PAYE. Keep in mind, that these figures change per year, so make sure you do your homework and double-check if you qualify for PAYE. 

How Does PAYE Work in South Africa?

As noted, PAYE works by having an employer withhold a certain amount of money whenever their employee receives their salary, wages, etc. 

The amount withheld will depend on the amount of money earned by the employee and certain people may be exempted if they are below the tax threshold. The employer will need to pay this money to SARS directly which ensures that the employees’ annual tax liability is continually settled throughout the year. 

If too much money is withheld and paid to SARS, the employee will receive money back at the end of the year. 

What is the Law on PAYE?
What is the Law on PAYE?

How is PAYE Calculated in South Africa?

PAYE is calculated based on the SARS annual tax tables which change each year. 

As such, you’ll have to make sure that you have the most up-to-date tax rate information available before you begin. For the most part, your PAYE calculations should look something like this – 

Calculating PAYE

Multiply the employees’ taxable earnings (including fringe benefits, contributions, etc*) by their payment periods (the rate at which they get paid) to establish the annual equivalent. 
In other words, if they are paid a fixed income each month, you’ll multiply their total monthly salary by 12. If they are paid weekly, you’ll multiply their weekly salary by 52, etc. 
 
Once you’ve worked out their annual equivalent, you’ll need to consult the SARS tax tables and find out what their tax rate is. Once you find this figure, you can work out their annual tax.
Now, divide their annual tax by their pay periods. In other words, divide it by 12 if they’re paid monthly, 52 if they’re weekly, etc. 
The resulting figure should be the amount you need to withhold from your employees’ salary/wages and send to SARS as their PAYE rate. 

*When you’re calculating PAYE for your employee, remember to factor in things like travel allowances, certain pension fund contributions, etc. 

When is PAYE Due?

PAYE needs to be submitted to SARS within 7 days from the end of the month it was withheld, even if the employee is paid weekly or biweekly.

If this day falls on a public holiday or on a weekend, the submission must be made on the last business day before that holiday or weekend. 

What Happens if PAYE is Paid Late?

When PAYE payments are not made on time, the employer may be charged a percentage-based penalty. This percentage will apply to the PAYE amount that must be withheld from the employee. 

Is PAYE the Same as Income Tax?

Not exactly. The money paid by your employer to SARS as a part of PAYE, usually only covers your employment earnings. 

By contrast, income tax can also include certain taxable earnings that are not related to your employment, such as rental income. As a result, an employee may need to make separate SARS payments even after a PAYE payment has been made by their employer. 

Are PAYE and UIF the Same?

Although both payments may be made on the same application, they are not strictly linked. If, for example, your employees are not paid enough to qualify for PAYE, you will still need to contribute towards the UIF on their behalf. 

What is the Law on PAYE?
What is the Law on PAYE?

In Conclusion – What is PAYE and How Does it Work?

PAYE (Pay-As-You-Earn), otherwise known as Employees’ Tax, is a type of income tax that is paid to SARS by employers. 

Instead of the employee receiving their full salary and then working out how much to pay in tax, PAYE requires employers to directly withhold the necessary amount of their employees’ salaries and then pay it to SARS directly. 

This process ensures that the employees’ annual tax liability is consistently settled throughout the year, and any surplus amount sent in by the employer will be refunded to the employees. 

The amount that needs to be paid per employee will depend on the tax rate for that individual. In other words, employers will need to consult the SARS tax tables and work out how much is required for each employee based on their salary/wages. 

These amounts change every year, so employers would do well to make sure that they are dealing with the most up-to-date information before they begin. Additionally, a tax threshold exists and employees who do not make enough money to reach this threshold will not need to submit for PAYE.  

The process for calculating PAYE can change depending on multiple factors ranging from the frequency of the pay period to the number of benefits and contributions relevant in each case. That said, the calculations will usually follow the same general formula – 

  1. Multiply the employees’ taxable earnings (including fringe benefits, contributions, etc) by the rate at which they get paid to establish the annual equivalent. 

For example, R20 000 (taxable monthly income) X 12 (periods worked each year). 

  1. Consult the SARS tax tables and find out what their tax rate is, then work out their annual tax. 
  2. Divide their annual tax by their pay periods.
  3. The resulting figure is the amount that needs to be sent to SARS every month as PAYE. 

PAYE payments are due for submission within 7 days of the end of the month in which they are collected. If the final day/s of submission fall on a public holiday or weekend, the amount must be paid on or before the last business day prior to that holiday/weekend. 

Failure to submit PAYE amounts to SARS on time may result in percentage-based penalty fees for the employer. 

PAYE is not strictly the same as income tax as the latter also includes certain taxable income that may not be gained via employment. For example, a person who collects taxable income from a rented property may still need to pay a separate income tax to SARS even after their employer has sent in the money for PAYE. 

Likewise, PAYE and UIF payments are not the same things. Although they may be made on the same application, PAYE submissions can be seen as a separate requirement from UIF submissions and employers will still need to register for the latter even if their employees do not qualify for the former. 

Disclaimer LAW101: All of our posts are for research purposes only. Law 101 aims to assist its readers with useful information on the laws of our country that can guide you to make decisions in line with the South African Governmental Laws currently in place. Although our posts cite the constitution in many instances, they are intended to assist readers who are looking to expand their knowledge of the law. Should you require specific legal advice we advise you to get in touch with a qualified legal expert.

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