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How is PAYE calculated on a staff bonus or incentive payment?
How is PAYE calculated on a staff bonus or incentive payment?
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Direct answer
SARS treats an annual bonus or incentive paid in a lump sum, or calculated without reference to a period, as an annual payment. PAYE is calculated by annualising the remuneration earned in the tax period, adding the annual payment, calculating tax on the combined result, then subtracting the tax on the annual equivalent alone. The difference is the PAYE deductible from the annual payment.
For payments in the 2027 tax year, use the 2027 SARS deduction tables. Do not apply a single flat percentage simply because it was used for a previous bonus.
What this means in practice
An annual payment is not limited to a payment called a thirteenth cheque. SARS includes annual bonuses, incentive bonuses, merit awards, certain leave payments, backdated salary or wage amounts accrued in earlier tax years, and a bonus or incentive to retain an employee for a specified period among its examples.
The employer does not merely add a lump-sum bonus to ordinary monthly pay and apply an informal rate. SARS's annual-payment method compares the tax due on the annual equivalent of remuneration with tax due after the annual payment is added. This approach recognises the employee's remuneration position for the tax period.
The calculation will depend on payroll facts. Those include the payment or accrual date, remuneration already earned in the period and the deduction tables applicable for the employee. A company should use its current payroll system and the SARS 2027 guide, rather than copy an illustration from another employee.
Step-by-step
- Identify the payment type.
Check whether the payment is a lump sum under the employee's conditions of service or the employer's practice, or is calculated without reference to a period. Keep the policy, contract or approval explaining why the amount is paid.
- Record the payment or accrual date.
Establish the tax period in which the amount is paid or becomes payable. This helps determine the current tax-year tables and the remuneration data used for the annual equivalent.
- Calculate the annual equivalent.
Use the employee's remuneration earned in the tax period and the relevant SARS method to calculate its annual equivalent. Keep the underlying payroll figures in the calculation file.
- Add the annual payment and compare tax results.
Calculate tax on the annual equivalent plus the annual payment, then calculate tax on the annual equivalent alone. The difference is the employees' tax deducted from the bonus or incentive.
- Check reporting and retain the working papers.
SARS says annual payments are reflected under IRP5 or IT3(a) code 3605. Reconcile the payroll calculation, amount paid and certificate treatment before the employer reconciliation is finalised.
Documents and records to keep
- Bonus, incentive or retention-payment policy, contract or approval.
- Payment or accrual date record.
- Employee remuneration and payroll data used for the tax period.
- 2027 SARS deduction tables and annual-payment calculation.
- IRP5 or IT3(a) working papers and reconciliation record.
Important limits and exceptions
This guide does not give a universal percentage for bonus PAYE. The employee's data and the applicable tax-year tables matter. It also does not treat overtime as an annual payment. SARS says overtime is added to salary for the specific period and taxed using the applicable deduction tables.
Retention payments can have special facts. SARS notes that where an employee must repay a retention amount after terminating service before the agreed period ends, employees' tax already paid on that amount may not be refunded to the employee. Back-pay and termination payments can also need separate review.
Do not use this article to calculate a retrenchment, retirement or death benefit. Those payments can involve a SARS tax directive and different treatment.
When to get tailored advice
Get tailored payroll advice for back-pay, retention arrangements, termination payments, annual awards paid to directors or employees with unusual remuneration structures, or a correction to a previous IRP5 certificate.
TaxProof can help organise the bonus authorisation and payroll evidence for review. It cannot calculate PAYE for a particular employee without the employer's current payroll records and applicable deduction tables.
Related TaxProof guides
- IRP5 certificates and EMP501 reconciliations
- Is a worker an independent contractor or employee for PAYE? (B02-BUS-006)