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### What is a PAYE:

Employees’ tax is the tax that is required to be deducted by an employer from an employee’s remuneration that has been paid or is payable. This process is known as PAYE (Pay-As-You-Earn).

### How is PAYE calculated:

1. Periodic tax basis:
• This method calculates tax on each payslip in isolation using the monthly tax table.
2. Tax averaging:
• This method calculates tax using employee’s income for the entire year to date which is then converted into an annual equivalent.

Most organizations use the Tax averaging method therefore, we will place emphasis on this method in this article.

### Annual equivalent calculation:

Before we can calculate our final tax payable amount, we must calculate the annual equivalent income by annualizing the year to date (YTD) income earned.

The tax amount is then de-annualized to get the tax for the period in question.

The annual equivalent amount is the average monthly salary multiplied by Twelve (12). For example if an employee earns R15 000 per month in March and April and then R17 000 in May, the employee’s YTD income would be R47 000 (R15 000 + R15 000 + R17 000) and the annual equivalent in the month of May would be calculated as R47 000/3 x 12 = R188 000.

The calculations are not always so basic; sometimes the employee receives irregular income, such as a bonus. Unlike regular income, irregular income is not annualized and where an employee receives regular and irregular income, the irregular income is added to the annualized regular income. The tax is then calculated on both the regular and irregular income.

The Video and Podcast below goes into more details regarding the topics we covered above.