We have come to the season of bonuses and many other employer-provided incentives. Your payslips will most likely be slightly different from what you are used to.
As most employees are set to receive bonuses this festive season, this could affect your pay-as-you-earn (PAYE) deduction and, of course, your take-home income, explains Gladness Mashilo and Jordan Mulindi, tax legal and accounting specialists at Latita Africa.
Despite this, employees are urged not to be alarmed by such slight changes. All too often, employees are worried that they’ll just be paying more tax, saying “this bonus will only take me into a new bracket”. This worry is not necessary.
Understanding how these changes work will ensure that the joy of receiving a bonus isn’t overshadowed by unexpected tax surprises.
How tax on bonuses is calculated
Bonuses are taxed at your marginal tax rate, which is determined by your total annual taxable income. When a bonus is added to your regular income, it temporarily increases your taxable income for the month, which can push you into a higher tax bracket. PAYE is then calculated on this higher income for that specific month.
For example, if your monthly salary is R30,000 and you receive a R20,000 bonus, your total taxable income for the month becomes R50,000. Mashilo and Mulindi advise that the PAYE deduction is based on this combined figure and could result in a higher tax amount than usual. This adjustment is temporary so any overpaid or underpaid tax will be reconciled when you file your tax return.
However, it does not mean that you are now being taxed more on every Rand you have earned – only the extra income would be subject to a higher marginal tax rate. So, whilst enjoying your festive season, remain tax savvy.
Stay informed, stay festive
Non-monetary tax-free incentives like gifts and rewards aren’t included as part of your taxable income unless they meet the criteria to be classified as “fringe benefits”. These exclusions help reduce the tax burden for employees enjoying certain perks.
In Apollo Tyres South Africa (Pty) Ltd v CCMA and Others (2013), the Court interpreted bonuses under section 186(2)(a) of the Labour Relations Act as an existing privilege, provided at the discretion of employers or based on company policy. Since bonuses are discretionary, employees must be well-informed about these temporary changes on their payslips, warns Mashilo and Mulindi.
By being aware of these changes, employees can mitigate the risk of tax discrepancies and ensure that their PAYE deductions are correctly accounted for. It is advisable to seek clarity from your employer if you notice any anomalies.
Managing additional income and tax compliance
The concept of taxing bonuses also applies to other forms of additional income, such as annual leave payouts and cash gifts. For example, if an employee receives a payout for unused leave days, this amount is added to their taxable income and could impact their marginal tax rate.
To avoid festive tax stress, stay tax compliant and ensure that your tax returns are filed on time. Mashilo and Mulindi emphasise that filing correctly can help you recover any overpaid tax or claim entitled refunds. It’s also crucial to consult with a tax practitioner if you are unsure about your compliance status or have questions about your PAYE calculations. Of course, it also pays to stay aware of any underpayments as well.
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