Pay As You Earn (PAYE)

What is PAYE?

PAYE is a tax deducted from employee’s income and is paid by an employer on behalf of the employee, unless a specific law provides otherwise. The tax is charged on all income of an individual in employment whether is received in cash or in kind. Every employee must file his or her annual tax returns at the end of every year at the registered tax office.

When to File PAYE Returns

  • Monthly PAYE return must be filed by the employer on behalf employees on or before the 15th day of the month following the month in which the deduction was made at the employer’s tax office.
  • At the end of the year the employer should submit to the Commissioner-General annual tax deduction schedule which shall specify tax deducted in respect of each employee.

Sanctions for PAYE

  • If an employer fails to file monthly PAYE returns on the due date, a penalty of five hundred currency points (GH¢500.00) and a further ten currency points (GH¢10.00) for each day that the failure continues.
  • When an employer fails to pay PAYE deducted on time, the employer would be made to pay an interest for a month or part of the month for which any part of tax is outstanding.

 

Other PAYE Deductions

These items are also deducted from employees’ income before calculating PAYE.

  • Social Security and National Insurance Trust-5.5% of basic salary.
  • Mortgage Interest paid on only one residential premises of the employee’ lifetime.
  • Provident fund up to 16.5% of your basic salary either paid by the employer or employee or both.
  • Contributions and donation to a worthwhile cause

 

PAYE Allowances

These are some of the allowances that will be added to salary for PAYE purposes such as; Transport allowance, Rent (Accommodation) allowance.

Risk Allowance, Night duty Allowance, Responsibility Allowance, Child Education Allowance, House Help Allowance, Cook Allowance, Garden Boy Allowance, etc.

Allowances paid in cash are added to the salary. Benefits to the employees in kind are added for tax purposes, but when the benefit is paid in kind, it is quantified in monetary value before it is added to salary such as electricity water, vehicle with driver and fuel, Vehicle and fuel, vehicle only, fuel only, accommodation and loan benefit are also benefit in kind which are quantified in the law. (See link: The Fourth Schedule of Act 896,2015 for the tax rates applicable.)

 

Example: Mr. Kofi is an employee of Yahweh Co. ltd. His monthly basic salary is GHC 1,500. additionally, he entitled to monthly allowances such Transport allowance GHC 500.00, Rent Allowance GHC 650, Risk allowance GHC 250. Mr Kofi contribute GHC 150 per month to a provident fund. Compute Mr Kofi’s monthly P.A.Y.E Payable.

  • PAYE for Temporary Workers

When a resident individual is a temporary worker, his or her tax is calculated as any other employee.

  • Casual Workers

When a person makes payment to a casual worker, there should be deduction of 5% tax on the amount and pay to C-G

  • Bonus

Employee bonus amount received is compared to 15% of the employees’ annual basic salary. If the bonus is not more than the 15%, the amount is taxed at 5% but if the bonus is more than the 15%, the difference between the bonus and the 15% is added to the employment income and tax.

Example 1:

Kofi’ annual basic salary is ghc40,000.

Total bonus received is Gh¢5,000.

Kofi’s Bonus tax

15% of GH¢40,000 = GH¢6,000

Total Bonus received Gh¢5,000

Because bonus received is less than the 15% of annual basic salary, Kofi’s tax on bonus is 5,000*5% = GH¢250

 

Example 2

Kofi’s annual basic salary is GH¢40,000.

Total bonus is GH¢ 7,000.

Kofi’s Bonus tax

15% of GH¢40,000    =            GH¢6,000

                      Bonus received             =                  7,000

                      Excess bonus (7,000-6,000) =         1,000

                      Bonus tax (6,000*5%)          =            300

The difference between the 15% and the bonus received of ghc7,000 is ghc1,000. The GH¢1,000 is then added to Kofi’s annual basic salary of GH¢40,000 and tax with the graduated rates.

 

Overtime

Overtime rate is applicable to employees who are junior staff and their qualifying employment income including profits and gains to be taxed in the year is not more than GH¢18,000. A junior staff whose qualifying employment emolument is more than GH¢18,000 is not entitled to overtime pay.

When an employer pays overtime to any employee that is not more than 50% of the employees monthly basic salary, the employer will deduct 5% as overtime tax. However, if the overtime paid is more than 50% of the employee’s monthly basic salary, the excess of the 50% is taxed @ 10%. Unlike bonus no overtime is added to basic salary. It should be noted that for non- resident employees’ tax on bonus or overtime is 20%

 

Example 1

Kofi is the manager of ABC Ltd, his basic salary for the month is GH¢1,400 and receives GH¢1,000 as overtime pay. Overtime tax is not applicable to Kofi because he is not a junior staff although his qualifying employment income (GH¢1,400*12=GH¢16,800 is not up to GH¢18,000. Kofi’s overtime pay will be added to salary and taxed).

 

 

Example 2

Kofi is a driver and receives monthly basic salary of GH¢800 and a total allowance of GH¢200 per month. His overtime pay for the month is GH¢ 500.Kofi’s qualifying employment income is GH¢12,000(800*12+200*12)

50% of Kofi’s basic salary is GH¢400 (800*50%)

Overtime pay is GH¢500

Overtime tax is computed as follows:

GH¢400*5               =         GH¢20

GH¢100(500-400) *10% =                  10

Total                                           30

 

  • PERSONAL INCOME TAX (PIT)

PIT is a tax charged on individual’s total income sources, such as income from Employment, Business and Investment. At the end of the year income from each source are put together as one and taxed.

PIT that should not taxed (sec 4 (2)(b) and sec 7 of ACT 896)

However, when resident individual receives any of the following payments like bonus up to 15% of annual basic salary, overtime, part time teaching, invigilation, examining, supervising an examination, lecturing and endorsement fees which are specifically stated in the tax law and which tax has already been deducted as final, is not included when calculating the income of the individual.

Resident individuals are taxed using the graduated rate

 

Monthly Graduated Tax Rate

Resident individual (self-employed & employees)

Chargeable income:

Rate
First:         GH¢261 Free
Next          GH¢70 5%
Next          GH¢100 10%
Next          GH¢2,810 17.5%
Next          GH¢6,759 25%
Exceeding GH¢10,000 35%
Casual labour 5%

 

Annual graduated Tax Rate

Resident individual (self-employed & employees)

Chargeable income:

Rate
First:         GH¢3132 Free
Next          GH¢840 5%
Next          GH¢1,200 10%
Next          GH¢33,720 17.5%
Next          GH¢81,108 25%
Exceeding GH¢120,000 35%
Casual labour 5%

 

Other Deductions

These items are also deducted from employees’ income before calculating PAYE.

  • Social Security and National Insurance Trust-5.5% of basic salary.
  • Mortgage Interest paid on only one residential premises of the employee’ lifetime.
  • Provident fund up to 16.5% of your basic salary either paid by the employer or employee or both.
  • Contributions and donation to a worthwhile cause

PAYE Allowances

These are some of the allowances that will be added to salary for PAYE purposes such as; Transport allowance, Rent (Accommodation) allowance.

Risk Allowance, Night duty Allowance, Responsibility Allowance, Child Education Allowance, House Help Allowance, Cook Allowance, Garden Boy Allowance, etc.

Allowances paid in cash are added to the salary. Benefits to the employees in kind are added for tax purposes, but when the benefit is paid in kind, it is quantified in monetary value before it is added to salary such as electricity water, vehicle with driver and fuel, Vehicle and fuel, vehicle only, fuel only, accommodation and loan benefit are also benefit in kind which are quantified in the law. (See link: The Fourth Schedule of Act 896,2015 for the tax rates applicable.)

Example: Mr. Kofi is an employee of Yahweh Co. ltd. His monthly basic salary is GHC 1,500. additionally, he entitled to monthly allowances such Transport allowance GHC 500.00, Rent Allowance GHC 650, Risk allowance GHC 250. Mr Kofi contribute GHC 150 per month to a provident fund. Compute Mr Kofi’s monthly P.A.Y.E Payable.

PAYE for Temporary Workers

When a resident individual is a temporary worker, his or her tax is calculated as any other employee.

Casual Workers

When a person makes payment to a casual worker, there should be deduction of 5% tax on the amount and pay to C-G

Bonus

Employee bonus amount received is compared to 15% of the employees’ annual basic salary. If the bonus is not more than the 15%, the amount is taxed at 5% but if the bonus is more than the 15%, the difference between the bonus and the 15% is added to the employment income and tax.

Example 1:

Kofi’ annual basic salary is ghc40,000.

Total bonus received is Gh¢5,000.

Kofi’s Bonus tax

15% of GH¢40,000 = GH¢6,000

Total Bonus received Gh¢5,000

Because bonus received is less than the 15% of annual basic salary, Kofi’s tax on bonus is 5,000*5% = GH¢250

 

Example 2

Kofi’s annual basic salary is GH¢40,000.

Total bonus is GH¢ 7,000.

Kofi’s Bonus tax

    15% of GH¢40,000    =          GH¢6,000

                      Bonus received             =          7,000

                      Excess bonus (7,000-6,000) =    1,000

                      Bonus tax (6,000*5%)                   300

The difference between the 15% and the bonus received of ghc7,000 is ghc1,000. The GH¢1,000 is then added to Kofi’s annual basic salary of GH¢40,000 and tax with the graduated rates.

 

Overtime

Overtime rate is applicable to employees who are junior staff and their qualifying employment income including profits and gains to be taxed in the year is not more than GH¢18,000. A junior staff whose qualifying employment emolument is more than GH¢18,000 is not entitled to overtime pay.

When an employer pays overtime to any employee that is not more than 50% of the employees monthly basic salary, the employer will deduct 5% as overtime tax. However, if the overtime paid is more than 50% of the employee’s monthly basic salary, the excess of the 50% is taxed @ 10%. Unlike bonus no overtime is added to basic salary. It should be noted that for non- resident employees’ tax on bonus or overtime is 20%

 Example 1

Kofi is the manager of ABC Ltd, his basic salary for the month is GH¢1,400 and receives GH¢1,000 as overtime pay. Overtime tax is not applicable to Kofi because he is not a junior staff although his qualifying employment income (GH¢1,400*12=GH¢16,800 is not up to GH¢18,000. Kofi’s overtime pay will be added to salary and taxed).

 

Example 2

Kofi is a driver and receives monthly basic salary of GH¢800 and a total allowance of GH¢200 per month. His overtime pay for the month is GH¢ 500.Kofi’s qualifying employment income is GH¢12,000(800*12+200*12)

50% of Kofi’s basic salary is GH¢400 (800*50%)

Overtime pay is GH¢500

Overtime tax is computed as follows:

GH¢400*5               =         GH¢20

              GH¢100(500-400) *10% =                10

Total                                          30

 

 

 Company Income Tax(CIT)

Companies pay tax on their business and investment income also known as gains and profits, which does not include expenses made to obtain the income.

The tax rate applicable to a company depends on the industry as follows:

Income of a Trust 25
Company principally engaged in the hotel industry 22
Company engaged in the export of non- traditional exports 8
Financial institutions from loans granted to farming enterprises 20
Financial institutions from loans granted to a leasing company 20
Manufacturing companies located in regional capitals  (except Accra & Tema) 18.5%
Manufacturing companies located outside Accra, Tema and the regional capitals 12.5
Free Zone Enterprises after 10 years tax holiday (on domestic sales) 25
Free Zone Enterprises after 10 years tax holiday (on export of goods and services) 15
Petroleum income tax 35
Mineral income tax 35
The following businesses pay 1% tax during their tax holidays. These businesses pay the actual tax rates after their tax holidays.
 

Item

 

Rate

Agro processing business conducted wholly in the country for the first five (5) years 25%
Cocoa-by product business wholly in the country for the first five (5) years. 25%
Tree crop farming for the first  ten (10) years 25%
Cash crops or livestock( excluding cattle) for first 5 years 25%
Cattle farming for first 10 years 25%
Waste processing business for first 7 years 25%
Income derived from a certified low cost housing company low cost housing company 25%
Young entrepreneurs who are into businesses such as manufacturing, information and communication technology, agro processing, energy production, waste processing, tourism and creative arts, horticulture and medicinal plants have five years tax holidays and after five years the following rates apply  

 

 

Accra and Tema 15%
Other regional capitals outside Tema and Accra 12.5%
Outside, Accra, Tema and other regional capitals 10%
The three northern regions 5%