What is Paye?
A pay-as-you-earn tax, or pay-as-you-go, is a withholding of taxes on income payments to employees.
Amounts withheld are treated as advance payments of income tax due. They are refundable to the extent they exceed tax as determined on tax returns.
How To Calculate Paye In Zambia
There are two standard methods for calculating employees’ tax – periodic and averaging / annual equivalent – both of which are acceptable to SARS.
These methods will be discussed with reference to monthly-paid employees but the principles are the same for employees who are paid weekly etc.
The term “income” will be used in this article to refer to the employee’s taxable income (remuneration for PAYE purposes).
- The periodic tax basis calculates tax on each payslip in isolation using the monthly tax tables
Annual Equivalent Calculation
The basic calculation involves working out an annual equivalent (annualizing the YTD income) on which tax is calculated. This tax amount is then de-annualized to get the tax for the period employed. The annual equivalent is the projected amount of income that an employee would earn in a year based on their YTD income*. Effectively, this is the amount of income an employee would earn if their average monthly income for the YTD period was multiplied by 12.
For example, if an employee earns ZMW10 000 per month in March and April and then ZMW20 000 in May, their YTD income would be ZMW40 000 (10 000 + 10 000 + 20 000) and the annual equivalent in May would be calculated as 40 000 / 3 x 12 = 160 000.
*Note: if an employee was employed for a partial period, e.g. if their appointment date didn’t fall on the first day of the payslip period, a pro-rata calculation will have to be performed to calculate their salary for that period. The salary for the partial period has to be added when calculating the YTD income; also, the portion of the period has to be added to the number of periods employed. For more information about the pro-rata calculation, please refer to the following article:
It is important to note that there are two types of income: regular and irregular. Regular income is anything that is paid at regular intervals such as salaries and commissions; irregular income is anything that isn’t regular, such as an annual bonus. Regular income is annualized whereas irregular income is not. In cases where an employee has both regular and irregular income, two annualization calculations must be performed:
- Annualized regular income = YTD / Months Employed x 12
- Annualised total income = YTD / Months Employed x 12 + irregular income
The tax is then calculated on each of these amounts and the difference between these two tax figures is the tax on an irregular income.
To get the tax for the relevant month, the annual tax on the regular income is worked back to its equivalent for the YTD period using the following calculation:
- Annual Tax / 12 x Months Employed
The tax on the irregular income, if any, is then added to this amount. This combined tax amount represents the total tax, for which the employee is liable up to this point in the year. Any tax paid to date, as well as any applicable medical aid tax credits, will be subtracted from this YTD liability to give the payslip tax.
The actual calculation used on each employee’s payslip can be viewed by clicking on the Tax (PAYE) link for the relevant month to view the Tax Trace.
Example
If a monthly paid employee under 65 years old started working on 1 March 2022 and earned ZMW10,000 in March and a sign-on bonus of ZMW20,000, their tax would be calculated as follows:
Tax on Regular Income
- Year-to-date regular income = ZMW10,000
- Annual equivalent = ZMW10,000 x 12/1 = R120,000
- Tax calculated on ZMW120,000 as per tax tables = R7,533
- PAYE payable on regular income = ZMW7,533 x 1/12 = R627.75
Tax on Irregular Income
- Projected total remuneration = Annual equivalent of regular income + irregular income = ZMW120,000 + ZMW20,000 = ZMW140,000
- Tax calculated on ZMW140,000 as per tax tables =ZMW11,133
- PAYE payable on irregular income = Tax on total income – Tax on regular income = ZMW11,133 – ZMW7,533 = ZMW3,600
Total tax for the month
PAYE liability for March = PAYE on regular income + PAYE on irregular income – PAYE paid in previous months of the tax year = ZMW627.75 + ZMW3,600 – 0 = ZMW4,227.75
What are the PAYE tax bands for 2023 Zambia?
Up to ZMW 4,800 – 0%
ZMW 4,801 up to 6,800 – 20%
ZMW 6,801 up to ZMW 8,900 – 30%
Over ZMW 8,900 – 37.5%
What is the formula for calculating PAYE tax in Zambia?
| CHARGEABLE INCOME | TAX RATE | TAX DUE |
|---|---|---|
| First ZW4,000.00 @ | 0% | 0 |
| Next ZW4,000.01 but not exceeding K6,800.00 | 20% | 200 |
| Next ZW6,800.01 but not exceeding K8,900.00 | 30% | 630 |
| Balance over K8,900 @ | 37.5% |
Who is eligible to pay PAYE tax in Zambia?
The Pay As You Earn system of deducting tax from salaries and wages applies to all offices and employment.
Tax under PAYE is to be deducted not only from monthly and weekly payments but also from daily, annual, or irregular payments. PAYE applies to casual employees as well as full-time workers.