What is Pay As You Earn (PAYE)?

Last Updated: 06 June, 2022 - Print

Pay As You Earn (PAYE) is the method of collecting Income Tax from employees on their earnings. The employer deducts PAYE when the payments are made. It could be weekly, fortnightly or monthly hence the name Pay As You Earn.

Who is eligible to PAYE?

Any employer who pays an employee in excess of K100, 000 per month or K1, 200, 000 per year is liable to deduct PAYE and remit to MRA.

PAYE rates

With effect from 13th August 2021, the rates used to charge income tax are as follows:

1.    Rates of income tax other than remuneration (Business)

•     The first K100,000 per month is taxed at 0%
•     The excess of K100, 000 is taxed at 30%.

2.    Rates of income tax on remuneration (Employment)

• The first K100, 000 per month is taxed at 0%
• The next K900,000 per month is taxed at 25%
• The next K2, 000,000 per month is taxed at 30%
• The next K3, 000, 000 per month is taxed at 35%
• The excess of K6,000, 000 per month is taxed at 40%

When should an employer register their employees who are eligible for PAYE?

Any employer who employs people whose earnings are in excess of K100, 000 per month or K1, 200, 000 in a year, is required to register.
The employer is also required to indicate the number of employees who are eligible for PAYE within a period of 21 days after becoming an employer.
In case of changes, for example, an employee has resigned, the employer is required to communicate to MRA within 14 days upon making those changes.
Usually, a booklet of 12 copies of Form P12 is supplied to the employer to cover a period of one fiscal year.

What other details does Form P1 contain?

• The name of the organisation
• The name of the officer (employer’s representative) or public officer who will be handling taxation issues on behalf of the organisation or company.
• Name of other places where the employer has offices or branches.
• Number of employees who earn more than K100, 000 per month or K1, 200, 000 per annum.
• A declaration by the employers’ representative that the information given is correct.
• Physical and postal addresses and contact numbers of the taxpayer.
  

When and where should PAYE be paid?

The deduction of PAYE from an employee’s earnings becomes due at the time when earnings are given to employee.
The amount of tax deductible should be remitted to MRA not later than the 14th day from the end of the month during which the tax was deducted. Payment can be made through cash, bank certified cheque, or direct electronic transfers 

Taxable Income                             Rate                 Total                               
K300, 000.00
First K100, 000.00                             0%                    =0.00
Balance K200, 000.00
Tax on next K200, 000.00                 25%                 =K50, 000.00

Summary

Gross salary         Tax payable                     Net salary
K300, 000.00         K50, 000                             K250, 000.00

NOTE: “Remuneration” means any amount of taxable income which is paid or payable to an employee as salary, leave pay, an allowance, wages, overtime pay, a bonus, a gratuity, a commission, a fee, an emolument, pension, superannuation, a retiring allowance or a stipend, whether in cash or otherwise.  

New PAYE brackets

The Malawi Government introduced additional brackets of 35 and 40 percent on any employee whose salary is above K3 million and K6 million, respectively. If one were earning K7, 000, 000 per month, tax would be deducted as follows:

Taxable Income                     Rate             Total              
K7, 000, 000.00  
First K100, 000.00                   0%                = K0.00
Balance K6, 900, 000.00
Tax on K900, 000.00                25%              = K225, 000
Next K2, 000,000                     30%              =K600,000

Since the salary is more than K6, 000,000, it would be liable to 35 and 40 percent PAYE brackets. This means that the balance would be taxed as follows:

Taxable income                    Rate                 Tax
The next K3,000,000              35%                 K1,050,000
Excess of K1,000,000             40%                 K400,000

Total tax payable is K0.00 + K225, 000.00 + K600,000 + K1,050, 000.00 +K400,000 = K2, 275, 000

Summary

Gross salary             Tax payable             Net salary
K7, 000, 000.00             K2, 275, 000.00             K4, 725, 000.00

Advantages of PAYE to taxpayers

•     It is convenient to pay while the money is available.
•     It is easy and cost effective to pay.
•     Affords the taxpayer to pay by installments other than having the burden to pay a lump sum.

What would happen to an employer who fails to remit or register their employees who earn more than K100, 000 per month or K1,200, 000 in a year?

Any employer who fails to remit or register their employees who are eligible for PAYE would be asked to: Pay all taxes due from the time he/she would have registered their employees plus 20% penalty of the taxes defaulted for the first month and a further sum of 5% per month or part thereof for the period during which the amount of the tax remains unpaid