The tax averaging method calculates the tax for an employee more accurately. This will be illustrated in this article using an example.
Scenario
Suppose that an employee earns no income in March 2022. They then earn R10 000 per month thereafter. The tax payable for the year is calculated as follows:
- Income for the year = R110 000 (R10 000 x 11 months)
- Tax for the year = R3 375 [(R110 000 x 18%) – R16 425 rebate]
Periodic Method – Monthly tax tables (not supported by SimplePay)
Using the 2023 monthly tax tables, the PAYE payable will be as follows:
| Month | Remuneration | Tax for the Month | |
|---|---|---|---|
| 1 | January | – | – |
| 2 | February | 10 000 | 432 |
| 3 | March | 10 000 | 432 |
| 4 | April | 10 000 | 432 |
| 5 | May | 10 000 | 432 |
| 6 | June | 10 000 | 432 |
| 7 | July | 10 000 | 432 |
| 8 | August | 10 000 | 432 |
| 9 | September | 10 000 | 432 |
| 10 | October | 10 000 | 432 |
| 11 | November | 10 000 | 432 |
| 12 | December | 10 000 | 432 |
| TOTAL | 110 000 | 4 752 |
As you can see, the employee overpaid tax for the year.
Tax Averaging Method (Used by SimplePay)
Using the tax averaging method, the tax would be calculated as follows:
| [A] Month Number |
[B] Month |
[C] Remuneration |
[D] YTD Income |
[E] Annual Equivalent |
[F] Tax on AE |
[G] YTD Tax Liability |
[H] Tax for the month |
|---|---|---|---|---|---|---|---|
| [D] / [A] x 12 | According to tax tables | [F] / 12 x [A] | [G] current month – [G] previous month | ||||
| 1 | March | – | – | – | – | – | – |
| 2 | April | 10 000 | 10 000 | 60 000 | – | – | – |
| 3 | May | 10 000 | 20 000 | 80 000 | – | – | – |
| 4 | June | 10 000 | 30 000 | 90 000 | – | – | – |
| 5 | July | 10 000 | 40 000 | 96 000 | 855.00 | 356.25 | 356.25 |
| 6 | August | 10 000 | 50 000 | 100 000 | 1 575.00 | 787.50 | 431.25 |
| 7 | September | 10 000 | 60 000 | 102 857 | 2 089.29 | 1 218.75 | 431.25 |
| 8 | October | 10 000 | 70 000 | 105 000 | 2 475.00 | 1 650.00 | 431.25 |
| 9 | November | 10 000 | 80 000 | 106 667 | 2 775.00 | 2 081.25 | 431.25 |
| 10 | December | 10 000 | 90 000 | 108 000 | 3 015.00 | 2 512.50 | 431.25 |
| 11 | January | 10 000 | 100 000 | 109 091 | 3 221.36 | 2 943.75 | 431.25 |
| 12 | February | 10 000 | 110 000 | 110 000 | 3 375.00 | 3 375.00 | 431.25 |
| TOTAL | 110 000 | TOTAL FOR THE YEAR | 3 375.00 |
As you can see, the employee doesn’t pay tax in March, April, May and June. This is because the annual equivalent is under the tax threshold. This is different to the periodic tax method. By the end of the year, the employee has paid exactly the amount of tax owed to SARS for the year under the tax averaging method, whereas they have overpaid tax under the periodic method.