Calculating PAYE on Regular Income
This article provides an explanation and examples of the calculation of PAYE where an employee earns only regular income.
Note:
- 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).
Calculating PAYE on Regular Income¶
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. The total PAYE due for a period is calculated as:
Total PAYE = PAYE on regular income + PAYE on irregular income
This article focuses on calculating PAYE on regular income. For information on calculating PAYE on irregular income, refer to the following help article:
PAYE on regular income is calculated by determining the tax on a projected income for the year (called the annual equivalent) and then de-annualising the tax to determine the tax payable for the period.
The following steps are involved in calculating PAYE:
Step 1: Calculate the year-to-date taxable income¶
Calculate the total taxable income (income + benefits + allowances – taxable income deductions) for the tax year-to-date (March to date).
Step 2: Calculate the annual equivalent¶
The annual equivalent is the projected amount of income that an employee would earn in a year based on their YTD income. It is calculated as:
| Pay Frequency | Formula |
|---|---|
| Monthly | YTD Taxable Income x 12 / number of periods worked |
| Twice a month | YTD Taxable Income x 24 / number of periods worked |
| Every two weeks | YTD Taxable Income x 26 / number of periods worked |
| Weekly | YTD Taxable Income x 52 / number of periods worked |
An alternative calculation can be: (YTD Taxable Income / number of periods worked) x 12
Step 3: Calculate the tax on the annual equivalent¶
Use the SARS tax tables to calculate the tax on the annual equivalent.
Step 4: Determine the projected annual tax liability¶
Subtract the applicable tax rebates to determine what the annual tax liability would be on the annual equivalent
Step 5: De-annualise the annual tax liability¶
Determine the annual tax liability by de-annualising the annual tax liability, using the following formulas:
| Pay Frequency | Formula |
|---|---|
| Monthly | YTD Taxable Income x 12 / number of periods worked |
| Twice a month | YTD Taxable Income x 24 / number of periods worked |
| Every two weeks | YTD Taxable Income x 26 / number of periods worked |
| Weekly | YTD Taxable Income x 52 / number of periods worked |
Step 6: Calculate the PAYE due¶
Calculate the PAYE due by subtracting the YTD PAYE paid from the YTD tax liability.
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:
Example¶
An employee under the age of 65 earns R10 000 in March 2022 and R12 000 in April 2022. Calculate the PAYE due each month. Use the SARS tax tables here.
| Step | March | April |
|---|---|---|
| Step 1: Calculate the YTD income |
10 000 | 10 000 + 12 000 = 22 000 |
| Step 2: Calculate the annual equivalent |
10 000 x 12 / 1 = 120 000 | 22 000 x 12 / 2 = 132 000 |
| Step 3: Calculate the tax on the annual equivalent |
120 000 x 18% = 21 600 | 132 000 x 18% = 23 760 |
| Step 4: Calculate the projected annual tax liability |
21 600 – 16 425 (primary rebate) = 5 175 | 23 760 – 16 425 (primary rebate) = 7 335 |
| Step 5: De-annualise the tax liability |
5 175 / 12 x 1 = 431.25 | 7 335 / 12 x 2 = 1 222.50 |
| Step 6: Calculate the PAYE due |
431.25 – 0 = 431.25 | 1 222.50 – 431.25 = 791.25 |
Notes on Fluctuating Income¶
As you can see, 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 for the remainder of the year. In this case, there may not be sufficient PAYE on subsequent payslips to recover the overpaid amount. This is because employers may not grant tax refunds – where an employee has overpaid, their liability in subsequent months will simply be 0. The employee therefore 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.
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.