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How does Pay-As-You-Earn (PAYE) work?

You may have seen the word PAYE on your IRP5 payslip or heard it mentioned by your employer, but have no idea of its meaning. All it really means is that you are paying the tax you owe to SARS on a monthly basis instead of all at once at the end of the tax year, hence PAYE means 'Paye As You Earn'. This is a good thing as it saves the taxpayer from having to pay between 18% and 45% of their earnings (the taxable amount) to SARS in cash once a year as a lump sum!

Employers are required to withhold these taxes each month and pay them over to SARS on the taxpayer’s behalf. They do this by consulting the SARS PAYE tables which have different tax rates for employees who are paid weekly, fortnightly or monthly.  The PAYE calculated as a result is based on the employee's earnings and includes basic salaries, bonuses, fringe benefits and other allowances.

PAYE is calculated monthly and paid to SARS by your employer monthly, even if you are paid weekly / fortnightly. When your employer calculates your PAYE, your earnings get multiplied by 52 weeks, 26 weeks or 12 months (depending on how often you get paid) to get an annual amount, before being applied to 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. To work out your PAYE contribution try our free salary tax calculator.

In cases where an employer pays certain things like medical aid, pension fund, income protection and/or a retirement annuity fund for you, or deducts these costs for you from your earnings, then your employer will take these deductions/credits into account when calculating your PAYE and making payment to SARS.

In some cases where the taxpayer has only worked part of a tax year they may even be able to claim a tax refund because of how the PAYE is calculated.

An example of this:

Tina worked 3 months of the 2021 tax year, from 1 December 2020 to 28 February 2021

She earned R8,000 per month, so R24,000 in total during those 3 months.

The employer deducted PAYE of: R193.50 x 3 = R580.50 in total.

However for the 2021 tax year Tina was under the tax threshold of R83,100 and she should not have paid tax at all.  In this case since the tax has been paid already but none was due, when the employee submits their tax return they will be entitled to a full refund of R580.50

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