PAYE vs Provisional Tax: Which One Applies to You?

Many South Africans are confused about PAYE and provisional tax. This guide explains both systems and helps you understand which one applies to your situation.

What is PAYE?

PAYE (Pay As You Earn) is a system where your employer deducts income tax from your salary before you receive it. The deducted tax is paid directly to SARS on your behalf.

How PAYE Works

1. Your employer calculates tax based on your monthly salary
2. Tax is deducted from your gross salary
3. You receive your net salary (after deductions)
4. Employer pays the tax to SARS monthly
5. You receive an IRP5 certificate at year-end

Who Pays PAYE?

• Employees with formal employment contracts
• Anyone receiving a regular salary from an employer
• Directors receiving salaries from their companies

What is Provisional Tax?

Provisional tax is a system where you pay income tax in advance, in installments, based on your estimated annual income.

How Provisional Tax Works

1. You estimate your taxable income for the year
2. Calculate tax using SARS tables
3. Make two mandatory payments (August and February)
4. Optional third payment available
5. Reconcile at year-end through tax return

Who Pays Provisional Tax?

• Freelancers and independent contractors
• Business owners (sole proprietors)
• Rental property owners
• Investment income earners (above exemption)
• Anyone with taxable income not subject to PAYE

Key Differences

Common Scenarios

Scenario 1: Full-Time Employee Only

• Tax system: PAYE only
• Action needed: None during the year
• Year-end: May need to file tax return (if income > threshold)

Scenario 2: Freelancer Only

• Tax system: Provisional tax only
• Action needed: Submit IRP6 twice yearly
• Year-end: File income tax return

Scenario 3: Employee + Freelance Income

• Tax system: Both PAYE and Provisional tax
• Action needed: Submit IRP6 for freelance portion
• Year-end: Reconcile both on tax return

Scenario 4: Employee + Rental Income

• Tax system: PAYE + Provisional tax
• Action needed: Pay provisional tax on rental income
• Year-end: Combine all income on tax return

When You Need Both

You must pay provisional tax in addition to PAYE if:

1. Your non-salary income exceeds R30,000 per year
2. You receive income from:
   • Freelance work
   • Rental properties
   • Interest (above exemption)
   • Business activities
   • Commission (if not taxed by employer)

Calculating Provisional Tax with PAYE

Step 1: Estimate total taxable income (salary + other income)

Step 2: Calculate total tax liability

Step 3: Subtract PAYE already deducted (estimate from IRP5/payslip)

Step 4: Pay the balance via provisional tax

Example Calculation

How PAYE Tax is Calculated

Your employer uses tax tables to calculate monthly PAYE:

Annual Equivalent Method

1. Multiply monthly income by 12
2. Apply annual tax tables
3. Divide by 12 for monthly tax
4. Adjust for tax directives

Factors Affecting PAYE

• Basic salary
• Bonuses and incentives
• Travel allowances
• Medical aid contributions
• Retirement contributions
• Tax directives

Managing Both Systems

Track Everything

• Keep records of all income sources
• Monitor PAYE deductions on payslips
• Track freelance/rental income separately

Plan for Cash Flow

• PAYE is automatic - no planning needed
• Provisional tax requires saving money for payments
• Set aside 25-35% of non-salary income

Use Tools

TaxTrack SA helps you:

• Track income from all sources
• Calculate provisional tax with PAYE offset
• Monitor your overall tax position

PAYE Refund Opportunity

If you're a PAYE taxpayer, you might be owed a refund if:

Over-Deductions

• Tax directive was incorrect
• Employment changed mid-year
• Bonuses pushed you into higher bracket temporarily

Claimable Deductions

• Medical expenses (Section 6B)
• Retirement annuity contributions
• Travel expenses (if not reimbursed)
• Home office expenses (if qualifying)
• Donations to approved organizations

How to Claim

1. File your annual tax return
2. Include all income and deductions
3. If tax paid > tax due, SARS refunds the difference

Common Mistakes

For PAYE Taxpayers

1. Not checking IRP5 for errors
2. Missing deduction opportunities
3. Not filing returns when due a refund

For Provisional Taxpayers

1. Forgetting to register
2. Missing deadlines
3. Underestimating income
4. Not keeping records

For Both

1. Not reconciling at year-end
2. Ignoring additional income streams
3. Not claiming all deductions

When to Consult a Professional

Consider getting help if:

• You have multiple income sources
• Your situation is complex
• You're unsure about deductions
• You've received an assessment you disagree with
• You're starting a business

Conclusion

Understanding whether you need PAYE, provisional tax, or both is crucial for tax compliance. Most South Africans with only salary income don't need to worry - PAYE handles everything. But if you earn additional income, provisional tax becomes necessary.

TaxTrack SA supports both PAYE and provisional taxpayers, helping you track income, calculate liabilities, and stay compliant with SARS.

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This guide provides general information. Consult a tax professional for advice specific to your situation.