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Five things every employee should know about income tax

When Finance Minister Enoch Godongwana tables his national budget on 23 February, South African taxpayers will learn about the latest tax regulations and measures for the upcoming year.

Before then, it’s worth reviewing five things every employer and employee should know about payroll tax and clearing up a few misconceptions about PAYE (employee tax).

1 – Salaries are not taxed differently from overtime, commission and bonuses

Many people still think that bonuses, overtime and commission are taxed at different rates to wages and salaries.

However, all income is taxed at the same rate on the payroll according to the standard annual PAYE tax tables from SARS.

There will, however, be a different code on the tax certificate to let SARS know what the payment is for.

There are some exceptions. In the case of retrenchment, retirement or death, an employee benefits from a once-off R500,000 lifetime exemption for lumpsum payments.

Your employer must apply for a directive from SARS to determine whether you have used the exemption before it can exclude such a payment from payroll taxes.

2 – South Africa has a progressive income tax system

There is a common misunderstanding that all income tax is levied at your marginal rate.

However, in South Africa’s progressive tax system, your remuneration is divided into different tax brackets.

The first portion of your annual income is taxed at the lowest rate of 18% and subsequent portions are taxed at progressively higher rates up to a maximum of 45%.

Based on the 2021/2 tax tables, here’s an example for someone who earns R450,000 a year, who would have a marginal tax rate of 31%.

  • They pay tax at 18% for the first R216,200 of their income.
  • They pay tax at 26% for the R216,201 to R337,800 portion of their income.
  • And they pay tax at 31% for the portion of their income from R337,801 to R467,500.

It’s thus not true that a salary increase that pushes you into a higher marginal tax bracket will mean that you will pay tax across all of your income at a higher rate.

If the person in our example gets an increase that takes their salary to R480,000 and their marginal rate to 36%, they only pay a tax rate of 36% on the R467,501 to R480,000 portion of their salary.

There is no reason to fear that moving up a tax bracket will result in you taking less money home at the end of the month.

3 – Tax treatment of allowances for company and private vehicles is not the same 

If you do a lot of travel by car for work—for example, to make deliveries or see clients—your company may provide a car/travel allowance to cover some of expenses.

In general, the allowance covers the use of your own car, but you can still get an allowance if you’re driving a company-owned vehicle.

However, your use of the company car will be fully taxable.  It should be reflected on the payroll as a taxable allowance rather than a travel allowance.

A deduction for business travel will be permitted against the use of the motor vehicle fringe benefit on which the employee was taxed monthly.

4 – An employee petrol card is taxed similarly to a travel allowance

If the employee makes use of a company-owned petrol or garage card, in respect of a private vehicle, then the tax treatment on the payroll is the same as when the employee would receive a travel allowance.

The only difference is that the allowance and the taxable amount may vary by month.

5 – Leave pay is more complex than you think

According to section 40 of the Basic Conditions of Employment Act (BCEA), each employee working an eight-hour day and a five-day week is entitled to 21 consecutive days (15 working days) of paid annual leave.

If you part ways with your employer, it must pay you out for any of these legally required leave days that you did not use.

However, if your company gives you more leave days than the legal minimum, it is not required under the BCEA to pay you for the excess days you didn’t use.

Your employment contract might specify that the additional days will be paid out if you leave without using them.

Note that you’re not allowed to sell days of your minimum leave to your employer (work your leave days to get paid more money).

You may sell leave days exceeding the 15 days of minimum leave back to your company.

Visit tax.sage.co.za for the latest expert advice, tips and support to help you stay ahead this Tax Year-End.

By Yolandi Esterhuizen, Registered Tax Practitioner & Director: Product Compliance, Sage Africa & Middle East

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Five things every employee should know about income tax