What is Pay As You Earn (PAYE)?

Last Updated: 17 August, 2023 - 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 5th April 2023, the rates used to charge income tax are as follows:

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

    The first K1,200,000 per year is taxed at 0%

    The excess of K1,200, 000 is taxed at 30%.

2.    Rates of income tax on remuneration (Employment)

•The first K100,000 is taxed at 0%

• The next K350,000 is taxed at 25%

•The next K2,050,000 is taxed at 30%

 The excess of K2,500, 000 is taxed at 35%

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.

Registration process is done through Msonkho Online. The PAYE return is also filed through Msonkho Online platform.

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.

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

How to calculate PAYE:

If an employee receives a gross salary of K600, 000.00 per month his/her tax will be calculated as follows:

Taxable Income                             Rate                 Total                              

K600, 000.00

First K100, 000.00                             0%                  =0.00

Balance K500, 000.00

Tax on next 350, 000.00                   25%                 = K87, 500.00

Balance K150,000.00                       30%                = K45,000.00

Total Tax payable                                                     = K132,000.00

 Total tax payable is K0.00 + K87, 500.00 + K45,000 = K132, 000.00

Summary

Gross salary         Tax payable                   Net salary

K600, 000.00         K132, 000                       K468, 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 has revised PAYE bracket for high income earners by removing the 40% bracket. 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
Next K350, 000.00                  25%              = K87, 000
Balance K6,550,000
Next K2, 050,000                     30%              =K615,000
Balance K4,500,000                   
Excess K2,500,000 @ 35%
Therefore: K4,500,000            35%             = K1,575,000

Total tax payable is K0.00 + K87, 500.00 + K615,000 + K1,575, 000.00 = K2, 277, 500

Summary

Gross salary             Tax payable                              Net salary

K7, 000, 000.00      K2, 277, 500.00                         K4, 722, 500.00

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