The tax averaging method calculates the tax for an employee more accurately. This will be illustrated in this article using an example.
Suppose that an employee earns no income in March 2020. They then earn R10 000 per month thereafter. The tax payable for the year is calculated as follows:
- Income for the year = R110 000 (R10 000 x 11 months)
- Tax for the year = R4 842 [(R110 000 x 18%) – R14 958 rebate]
Periodic Method – Monthly tax tables (not supported by SimplePay)
Using the 2021 monthly tax tables, the PAYE payable will be as follows:
As you can see, the employee overpaid tax for the year.
Tax averaging method (Used by SimplePay)
Use the tax averaging method, the tax would be calculated as follows:
As you can see, the employee doesn’t pay tax in March, April and May. This is because the annual equivalent is under the tax threshold. This is different to the periodic tax method. By the end of the year, the employee has paid exactly the amount of tax owed to SARS for the year.