Tax and SARS knowledge base
When an employer needs a SARS directive for backdated salary
When should an employer obtain a SARS directive for backdated salary?
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Direct answer
An employer should obtain a SARS directive when backdated salary or pension accrued in a previous tax year. SARS says that a backdated amount relating only to the current tax year is added to remuneration and PAYE is calculated without a directive. The critical question is the period to which the amount accrued, not simply the date it is paid.
Backdated salary can arise after a salary correction, settlement agreement, arbitration award or court order. These cases should be separated from bonuses, severance benefits and other termination payments before the payroll team chooses a directive category.
What this means in practice
A delayed payroll payment is not automatically a prior-year backdated-salary directive case. For example, an increase agreed and paid during the same tax year may be processed through normal payroll if it relates to that same year. But a settlement in the current year for underpaid amounts attributable to prior years needs a directive application under the SARS guidance.
The distinction affects PAYE calculation and certificate reporting. SARS states that the employer must ensure the annual income supplied in a prior-year directive application is correct, because SARS uses that information to determine the employees' tax. An inaccurate annual-income figure can produce an inaccurate withholding instruction.
The employer must also avoid putting unrelated amounts into the backdated-salary application. SARS's completion guide says that, for this application reason, only the backdated salary or pension amount field is used. If the payment also includes a bonus, leave pay, legal-cost contribution or severance amount, those components need their own review.
Step-by-step
- Identify the legal and payroll reason for payment.
Obtain the pay-rise letter, settlement, arbitration award, court order or payroll-error evidence. Record the dates and the amount attributable to each historic period.
- Split the amount by accrual period.
Prepare a schedule that separates salary relating to the current tax year from salary relating to prior tax years. Do not rely on a single total in a settlement agreement where the underlying periods can be identified.
- Apply the current-year rule where appropriate.
Where the amount relates to the current tax year, add it to the remuneration received and calculate PAYE under the applicable current tables. Keep the calculation with the pay-run evidence.
- Prepare a prior-year directive application.
Where the amount accrued in prior tax years, use the SARS backdated-salary directive process before making the qualifying payment. Provide the amount and required breakdown accurately. Retain the directive number and resulting instruction.
- Process the payment as directed.
Apply the PAYE in the directive where one is issued. Confirm the current certificate coding and the information required on the IRP5 or IT3(a). Never substitute an internal estimate for a directive instruction.
- Reconcile the final records.
Match the payment, PAYE, directive, payslip and tax certificate. Explain the records to the employee without predicting their final assessment.
Documents and records to keep
Keep the source agreement or order, historic payslips, period-by-period calculation, payroll approval, directive application, issued directive, payment proof and certificate support. These documents are particularly important because a prior-year correction can be reviewed long after the current payroll run.
Important limits and exceptions
The fact pattern matters. A bonus, a settlement with multiple components, a pension amount, termination payment or amount paid to an estate may follow different rules. The guide does not allow an employer to call an amount "backdated salary" merely to obtain a preferred withholding result.
Use the SARS process and guide current at the time of application. A directive does not remove the need for correct financial records or complete employer reconciliation.
When to get tailored advice
Get advice before paying a large settlement, an amount across more than one prior tax year, or a payment that includes termination or pension components. Seek review if the employee has left, the documents do not allocate the amount clearly, or an existing directive seems inconsistent with the payment.
TaxProof can help prepare a defensible payroll schedule. We cannot issue a SARS directive or interpret a court order for either party.