[Question] Tax on leave pay and bonus

[Martinco]

Traditionally the Iron and Steel Industry closes over Dec/Jan and in the General Agreement the amount calculations for leave and bonuses are set out.

I use a payroll program into which I put the amounts and the program calculates the amount of PAYE.

A problem now arises if one puts the total amount of money ( leave pay plus bonus ) into the program, the tax calculation is pretty steep and although the program adjusts the tax on subsequent payslips ( mid Jan till end Feb ) one tends to get a worker dissatisfaction if they look at the "huge" tax deduction.
On this pay run the program makes an " over tax calculation" and causes an employer/employee relationship problem.

Now I can see three possibilities:

1) Put all amounts on one payslip. ( and have the problem ! )
2) Make three payslips for the three weeks leave pay and add the bonus to one.
3) Make three payslips and add to each payslip 1/3 of the bonus amount.

Will option 3 not be better to "confuse" the payroll program not to see the amounts as a huge "increase" in pay and hence adjust the estimated yearly income dramatically and also the tax deducted ?

[Dave A]

Does the payroll package not allow for annual payments or calculate the PAYE progressively?

Also just to point out that the tax accrued on any "extra" payment looks steep to any employee that is above the taxable threshold. This is because the effect of the marginal rate isn't blunted by the primary (and secondary, where applicable) rebates.

[Martinco]

Does the payroll package not allow for annual payments or calculate the PAYE progressively?

Also just to point out that the tax accrued on any "extra" payment looks steep to any employee that is above the taxable threshold. This is because the effect of the marginal rate isn't blunted by the primary (and secondary, where applicable) rebates.

Dave, it does allow for annual payments but still adjusts the yearly income to a higher tax than what it should be and some workers that fall into a no-tax bracket to a taxable bracket. ( and gives the tax back on subsequent payslips ). I realize that at the end of the tax year they should be even again but it is the initial shock that upsets the apple cart.
I had this situation last year and I am trying to find a way to avoid the unpleasantness.
Last year I told them that if they are unhappy with the tax, they should bring me a tax directive from SARS and I shall change the tax amount, but this did not go down very well. !
Unfortunately it is always the employer that is seen to be the villain in the story.

[Neville Bailey]

Another approach to look at (provided you get consent from the employees), is to over-tax them slightly every month so that, when the annual lumpsums get paid towards the end of the tax year, the payroll system does not make the usual large tax calculation.

When the last tax period comes along, the payroll system will adjust the cumulative tax deducted accordingly.

[Martinco]

Another approach to look at (provided you get consent from the employees), is to over-tax them slightly every month so that, when the annual lumpsums get paid towards the end of the tax year, the payroll system does not make the usual large tax calculation.

When the last tax period comes along, the payroll system will adjust the cumulative tax deducted accordingly.

Neville, yes a thought and I can only put it to the workers and see what their reaction is.
I am not using Pastel payroll but is there a facility to change the amount of tax or does one just make a deduction as a "saving" ?

[Neville Bailey]

I don't specialise on Pastel Payroll (as you know, I consult on Xpress and Partner), so I have just sent a message to my Payroll associate to get her feedback...

Feedback received: "Yes, you can override on the default tab so the override stays fixed and you can remove the override when you pay out bonuses at the end of the year and the system will then self-adjust."

[Martinco]

Just some feedback....................
According to the Mirror payroll expert:
I need to make the payslip for the last week actually worked and add the bonus to that slip. ( This now shows a hefty tax amount. )
Then continue and make the next three (leave) payslips in which the system will automatically deduct the overtax and should leave them with the correct tax to be paid.
Just a correction.........the SA Iron and Steel now renamed the "bonus" to: "Leave enhancement pay".

[Pastel Payroll Consultant]

Good Day

Rather Late Reply

When Using Pastel Payroll and if leave is processed for weekly paid employees , Pastel Payroll includes the number of weeks that you have put the employee on leave in the average tax calculation i.e. if you processed leave for an employee in week 42 for 3 weeks , then Pastel Payroll will use 45 weeks in its tax calculation.

Kind Regards

[Martinco]

Ok, I understand this but the problem arises when I add the "bonus" amount. It is not the normal tax on wages that poses the problem. As I have stated in my previous post, I added the bonus to the last week worked payslip and made the subsequent payslips for leave pay and presented all these payslips to the workers and showed them that the tax raised on the first payslip was offset on the others. They appeared happy !
I think the secret is to NOT add the bonus to the last payslip................this causes the unhappiness.

[Dave A]

I think the secret is to NOT add the bonus to the last payslip................this causes the unhappiness.

Psychology can throw up some real surprises at times.

I think you're onto something. Now I'm wondering where else it could be applied.