Statutory Deductions
Understanding Statutory Deductions and Taxes in South Africa: UIF, PAYE, and SDL
Unemployment Insurance Fund (UIF)
Overview
The UIF provides temporary financial assistance to workers in South Africa who lose their income due to unemployment or inability to work under certain circumstances (e.g., maternity, adoption leave, illness). It also offers support to the dependants of a deceased contributor.
Contribution Requirements
Employees and Employers: Both employees and their employers are generally required to make contributions to the UIF.
Exclusions: Certain categories of employees are exempt from contributing to the UIF. These include:
Employees working for less than 24 hours a month for an employer.
Employees in the national or provincial sphere of government, including specific high-ranking government officials.
Members of municipal councils, traditional leaders, and members of certain legislative bodies.
It is the employer's own responsibility to ensure that when an employee is excluded from paying UIF, they fall into one of these specified categories.
Contribution Rate
The employee's contribution rate is set at 1% of their remuneration.
Employers contribute an additional 1%, making the total contribution 2%.
Maximum Contribution Ceiling
The maximum earnings ceiling for UIF contributions is R17,712 per month (or R212,544 annually as of 1 June 2021). For employees earning more than this, the contribution is calculated using the maximum earnings ceiling.
For more detailed information, please visit the UIF section on the SARS website.
Pay As You Earn (PAYE)
Overview: PAYE involves the deduction of tax from an employee's remuneration by the employer.
Applicability: Employers are required to submit monthly declarations and payments to SARS.
Payment Procedure: Payments must be made within seven days after the end of the month during which the amount was deducted.
For more detailed information, please visit the PAYE section on the SARS website.
PAYE Annual Method
The concept of the annual equivalent in PAYE calculations involves estimating an employee's annual income based on their current taxable remuneration, even if those earnings fluctuate each month. By calculating PAYE on an annualised basis, the tax system smooths out monthly variations in income.
This approach ensures that employees with variable earnings, such as those receiving bonuses or commissions, are taxed more evenly throughout the year. This prevents over-taxation in high-earning months and under-taxation in low-earning months, providing a more accurate and fair tax deduction each month, leading to better financial stability and predictability for employees.
Step-by-Step Guide to Calculate PAYE (Annual Method)
Determine the Annual Income
Add up all the employee’s taxable income, the taxable benefits and deduct the tax deductible deductions for the year. This includes salary, allowances, and any other taxable benefits. To get an estimate for the year, take the total income for the year thus far, divide it with the periods employed in the tax year and multiply it by the total periods in the year.
Apply the Tax Brackets
South Africa has a progressive tax system, meaning the more you earn, the higher the tax rate. The income is divided into portions and each portion is taxed at a different rate. Here are the annual tax brackets for the 2024/2025 financial year.
Calculate the Tax for Each Bracket
Break down the annual income into the portions that fit into each tax bracket and calculate the tax for each portion. Then, sum these amounts to get the total annual tax.
Subtract Tax Rebates
Taxpayers are entitled to rebates which reduce the amount of tax payable. Here are all the tax rebates applied for the 2024/2025 financial year.
Deannualise tax for the year
The final annual tax amount is divided by the periods employed to determine the amount of the PAYE deduction for the current periods employed.
Deduct PAYE already paid
Deduct the PAYE already paid in the previous periods to get to the current periods PAYE.
Example Calculation:
Periods employed: 61 days Basic Salary: 52000 Pension fund deduction: 2000
Annual Income:
R52000 - R2000 / 61 x 366 (this tax year is a leap year)
Annual income - R300,000
Apply Tax Brackets:
This employee’s annual income falls in the R216,200 - R337,800 tax bracket
We deduct the closing portion of the previous bracket from the annual income, then multiply it by the % of the bracket and add the tax already calculated in the previous bracket: R300,000 - R216,200 = R83,800 x 26% = R21,788 + R38,916 = R60,704
Subtract Rebates:
R60,704 - R17,235 (primary rebate) = R43,469
Periods employed PAYE:
R43,469 / 366 * 61 = R7,244.83
Deduct PAYE already paid:
R7,244.83 - R3,681 (tax paid in previous period) = R3,563.03
So, this periods PAYE deduction for an annual income of R300,000 would be approximately R3,563.03
Since our system allows you the flexibility to adjust the end date of your period, our PAYE calculations uses the days employed in its calculation to determine the periods employed. This could cause a slight difference in the PAYE calculation in certain months if you compare it to PAYE calculations that use full periods - but the yearly calculation will remain the same.
Reasons for Unexpected PAYE Values
Incorrect Active Periods:
Explanation: The active period refers to the timeframe during which an employee is actively earning income in the current tax year and subject to tax deductions.
Impact: If the active period is incorrectly set (e.g., starting too late or ending too early), the PAYE calculations may be based on incomplete or incorrect data, leading to inaccurate tax deductions. For instance, if an employee’s active period is recorded as shorter than it actually is, the system might calculate higher monthly taxes due to a perceived higher average monthly income.
Missing Take-On Balances:
Explanation: Take-on balances are the amounts of income, deductions, and tax already accrued in the current tax year at the start of a new payroll system or when an employee joins mid-year.
Impact: Missing take-on balances mean that the system lacks crucial historical data. This can result in incorrect annual income projections, leading to either over-deduction or under-deduction of PAYE. For example, if previous earnings and taxes paid are not considered, the system might treat the current period's earnings as if they are the only earnings for the year, causing incorrect tax calculations.
Incorrect Tax Codes:
Explanation: Pay Run Templates are used to capture and process payroll data, and these templates must have correct tax codes linked to different types of earnings and deductions.
Impact: If the tax codes are incorrect, certain types of income may be taxed at incorrect rates or might not be taxed at all. For instance, if a bonus is linked to a tax code meant for non-taxable income, it won't be included in the PAYE calculation, resulting in lower than expected tax deductions.
Zero Income Periods Due to Maternity or Extensive Illness Leave:
Explanation: Periods where an employee earns no income, such as during unpaid maternity leave or extended illness leave.
Impact: Zero income periods can cause significant fluctuations in periodic earnings, affecting the annual equivalent calculation. Items such as Maternity leave are usually paid by the department of labour, which results in zero payslips for a number of periods for these employees. These zero periods significantly reduce the annual income amounts leading to zero PAYE deductions upon their return. This is a normal occurrence with the annual tax calculation. Because their annual equivalent is less than the initial estimation in the previous periods, the system will not deduct any PAYE until it reaches the point where the annual equivalent is the same or more than it was in the period before the employee went on Maternity leave.
Employees Age:
Explanation: Employees over the age of 65 get an additional tax rebate. Employees over the age of 75 get the additional rebate of being over 65, and yet another additional rebate of being over 75.
Impact: When moving into the a tax year when an employee turns 65/75 (even if the employees birthday is in February of the next year - if it is still in the date parameters of the tax year then the additional rebate(s) will be applicable for the entire year of assessment), then there will be significantly less PAYE for the employee from the March period going forward due to the additional rebates. These employees also earn an additional tax credit if they have a medical aid which will further reduce their PAYE.
Bonuses:
Explanation: Bonuses are seen as an irregular/periodic payment. Due to this it is not included in the annualisation of the figure, but rather only gets added to the calculation once the annual equivalent has already been determined.
Impact: When processing a bonus, it is normal to see a sharp increase in the amount of the PAYE compared to the PAYE in the previous periods. The increased amount can be a lot higher if the Bonus caused the calculation to move into a higher bracket. This can also cause employees that don’t usually pay PAYE to pay PAYE in a specific period due to the bonus.
Skills Development Levy (SDL)
Overview: SDL is a levy to encourage learning and development in South Africa, calculated based on an employer's salary bill.
Who Must Pay: Where an employer expects that the total salaries will be more than R500 000 over the next 12 months, that employer becomes liable to pay SDL.
The R500 000 includes all wages and salaries paid by the company to employees.
Payment Amount and Procedure: SDL is 1% of the total amount paid in salaries to employees, and must be paid within seven days after the end of the month during which it was deducted.
For more detailed information, please visit the SDL section on the SARS website.
UIF, PAYE and SDL must be submitted monthly with your EMP201.
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