While most of us are usually very familiar with our expenses - whether that means our regular payments, what we choose to splurge on, or working with a budget - few of us delve in to understand the varying forms of income, or how income tax works.
Our Financial Wellbeing Report found that 87% of South Africans aspire to earn more than R20,000.00 per month - and the key to managing a successful income, as well as budgeting and later investing - is knowledge.
Here, we’ll unpack exactly what you need to know about income, so that you can plan for the future, get ahead, and make the most of your daily, weekly, or monthly pay.
What are the different forms of pay?
When you are either a part-time or full-time employee, contractor, or freelancer, you will be paid in exchange for your work. It’s important to note that, depending on your level of involvement, the amount of work you take on, or your working arrangements, the nature of your pay might differ. There are many broad forms of payment, but they usually form one of the following categories:
The terms ‘salary’ and ‘wages’ are sometimes used interchangeably, but they have an important difference. ‘Wages’ refers to pay that is based on the number of hours worked, or your performance in doing such work.
Wages are typically not fixed - that is, you may not be paid nor expect to receive a set amount of money at the end of your working period - but instead you will be paid at rates that you have previously agreed with your employer that are determined by the number of hours you work, or the results you achieve.
In contrast to wages, a salary refers to a paid arrangement that sees you paid on a fixed arrangement. That typically means that each month (or in some cases, a week) you will be paid a fixed amount of money regardless of any small difference in the number of days you have worked over that period (due to weekends or public holidays).
Commissions are a form of payment that you might receive as a result of rendering services or selling products. Commissions are usually used as a form of motivation for employees in sales - should an employee manage to reach a certain number of sales or other similar target in their profession, they may be rewarded with a small portion of that profit (the commission) as payment in exchange for their services.
The level of commission that is paid is likely to change as an employee reaches (or fails to reach) certain goals.
Overtime pay is usually received when an employee contributes to their workplace outside of their regular working hours. Overtime pay is usually only offered to salaried employees, meaning that you must have a fixed agreement in place before charging overtime for any work that you might have been tasked to complete outside of your normal working hours.
While overtime pay might be negotiated between employees and employers, most salaried employees who earn more than R205,433.30 per year are not eligible to receive overtime pay, according to Labour Guide.
Many employees in the service industry (such as waitrons) might receive a ‘tip’ or ‘gratuity’. This is a form of pay that is expressed as a gratitude (thanks) from one party to another. Many workplaces in the service industry allow waitrons or attendants to accept tips while in the course of their regular work.
Bonuses are usually only paid to salaried employees, and are usually dependent on a company or group of individuals achieving certain results important to a business's success. If such a result is achieved, an employee might be rewarded with a 13th cheque (an additional payment over and above their monthly salary) or another form of reward which is usually tied to the monthly salary they receive.
What is gross pay?
‘Gross’ pay refers to the total amount of payment one can expect for their work, before any deductions are removed from the total payment itself.
What is nett pay?
Nett pay refers to pay that is offered after deductions have been made, or after expenses have been applied. Nett pay is also referred to as ‘take-home pay’, as salaried employees would be offered this amount after all deductions have been made.
What are deductions?
Many employers and employees negotiate ‘benefits’ that might be deducted from gross pay, leaving only nett pay. For example, an employer might offer the benefit of contributing half of an employee’s medical aid costs. The remaining half of this amount would be deducted from an employee’s salary before reaching their account - forming a ‘nett pay’.
What is Income Tax?
Income Tax is a tax that is applied to entities (such as businesses) or individuals that will vary as their relevant level of income or profit varies. In South Africa, individuals who earn over a certain amount of money per year are expected to pay tax on their earnings.
In South Africa, many salaried employees contribute to PAYE (Pay As You Earn) which sees tax amounts offered as a deduction on gross pay. As an employee earns more over time, they can expect to pay more tax. This is calculated through what are called Income Tax Brackets.
What are Income Tax Brackets?
Income Tax Brackets define the amount of tax an employee will pay based on their annual (yearly) income. As an employee earns more over time, they will pay more tax - and this is defined by the level of annual income they receive and which ‘bracket’ it falls into.
‘Brackets’ are defined by the South African Revenue Service, and can vary from time to time. At the lowest bracket, South Africans earning below R195,850.00 per year will need to pay a total of 18% of their entire annual income as tax.
However, in the following brackets, it is important to note that taxpayers will need to contribute a further amount. For example, a person earning between R195,851.00 to R305,850.00 per year would need to pay 26% of their income as tax, as well as an additional fee of R35,253.00 each year.
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