Thread on bonuses and other windfalls (via employment) like share options and commission.
Getting a bonus is fun. But losing almost half your bonus to tax isn't fun.
Here's why it happens and what to do about it.
Getting a bonus is fun. But losing almost half your bonus to tax isn't fun.
Here's why it happens and what to do about it.
1. The salary is annualised;
2. The tax on the full annualised salary is calcuted;
3. The tax is then divided by 12 to get to the monthly PAYE to be calculated.
It's important to note that the annualised salary only takes into account THAT month (not other months).
2. The tax on the full annualised salary is calcuted;
3. The tax is then divided by 12 to get to the monthly PAYE to be calculated.
It's important to note that the annualised salary only takes into account THAT month (not other months).
Example: Mrs X get's a monthly salary of 30k
1. Annualised salary: 30 x 12 = 360k
2. Tax on 360k = 61.7k
3. 61.7k / 12 = 5.1k PAYE
Gross salary: 30k
Nett salary: 24.9k
1. Annualised salary: 30 x 12 = 360k
2. Tax on 360k = 61.7k
3. 61.7k / 12 = 5.1k PAYE
Gross salary: 30k
Nett salary: 24.9k
But what if Mrs X gets a 13th cheque? A bonus of 30k in December...
1. Annualised salary: (30+30) x 12 = 720k
2. Tax on 720k = 189k
3. 189k / 12 = 15.7k
Gross salary in Dec: 60k
Nett salary in Dec: 44.3k
So instead of getting the full 30k bonus, she only gets 20k of it.
1. Annualised salary: (30+30) x 12 = 720k
2. Tax on 720k = 189k
3. 189k / 12 = 15.7k
Gross salary in Dec: 60k
Nett salary in Dec: 44.3k
So instead of getting the full 30k bonus, she only gets 20k of it.
The reason why this happens is what I like to refer to as: The Annualisation Conundrum
Months were large bonuses / commissions etc are paid, gets annualised - this inflates your annual income (temporarily) and you pay an inflated amount of PAYE to cover the tax.
Months were large bonuses / commissions etc are paid, gets annualised - this inflates your annual income (temporarily) and you pay an inflated amount of PAYE to cover the tax.
This doesn't mean it's wrong. It's in fact, calculated correctly - but it still makes you feel like you're getting screwed somehow.
Not pleasant.
Not pleasant.
One way to counteract this problem, is if your employer can reliably predict early in the year what bonus you'll get.
They can then factor it in, into your monthly PAYE.
This is called bonus smoothing.
Doesn't sound too soothing (anyway)
They can then factor it in, into your monthly PAYE.
This is called bonus smoothing.
Doesn't sound too soothing (anyway)
With bonus smoothing, you divide the PAYE you would've paid on your bonus into the 11 months that you don't get a bonus...
But when bonus month comes around, you get your bonus "tax free".
That's because you've already paid the bonus PAYE over the other months.
Smooth.
But when bonus month comes around, you get your bonus "tax free".
That's because you've already paid the bonus PAYE over the other months.
Smooth.
My tip to you, is to anticipate a large PAYE spike in a month, by checking when your next windfall is coming, annualising your own salary, and mentally prepare yourself for the massive PAYE you're about to pay.
Some, very organised companies will even allow you to opt-in for bonus smoothing.
My wife worked for MSF, and they were willing to make this adjustment - so when bonus month hit, it felt really nice getting that big lump sum "tax free".
My wife worked for MSF, and they were willing to make this adjustment - so when bonus month hit, it felt really nice getting that big lump sum "tax free".
The thread is a day late - but I still delivered none-the-less.
Check out taxmaverick.co.za for more assistance.
Check out taxmaverick.co.za for more assistance.
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