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Guide to payroll for African businesses



Guide to payroll for Africa

Payroll is one of the most important operations a business needs to carry out. It refers to several activities related to getting your employees paid on time, while also sending the correct tax to the authorities. Governments right across Africa – including Nigeria and Ghana – are clamping down on businesses that are failing to fully declare their dues, so ensuring your payroll is handled efficiently and without mistakes is doubly important.

What is PAYE?

PAYE tax refers to Pay as You Earn, a system of personal taxation, where the employer is required to deduct tax from the employee’s payslip, before sending this to the relevant tax authorities.

PAYE requires you or your accountant to calculate the exact amount of tax each employee will pay, depending on their circumstances and gross salary.

PAYE was designed to make it easier for governments to collect income tax revenue. Without PAYE, all individuals would be required to complete their own annual tax return and pay tax once per year – which gives the government much less regular income and creates more potential for human error and fraud.

PAYE systems vary from one country to the next, reflecting the different tax bands set by their governments. In some countries there is no tax on the initial earnings, while others have no tax-free allowance. In Ghana, for instance, the first 3,132 GH¢ are not taxed, but you begin paying for all earnings above that amount. By contrast, Kenyans pay 10% of their first 0-1298KES, then 15% on the next 11,587 and so on.

Making sense of your payslip

Payslips can be confusing documents with their curious codes and unexplained figures, and employees are often unsure as to why certain deductions have been made. In case of doubt, raise the question with your company’s accounting department. That said, there are certain common details that are found on most payslips, including:

  • Gross pay: This is your initial pay before any PAYE tax has been removed
  • Net pay: This is your ‘take home’ pay – the money you receive after all tax is removed
  • Payroll number: Every individual by your company will be attributed a payroll number
  • Your tax code: Depending on your employment situation and other factors (how many jobs you have, your marital status etc.), you will be assigned a tax code by the authorities
  • Deductions: This counts for all types of tax that are collected by your employer on behalf of the tax authorities
  • Sick pay and other types of leave: Sick pay and maternity/paternity leave may be itemised separately on your payslip
  • Other benefits: Be it bonuses, overtime or company perks, other benefits you receive may be included in your payslip
  • Exemptions and reductions: In some countries, there are various exemptions and tax relief that may be noted on your payslip. In Nigeria, for instance, reductions for costs like dependent family, children or medical allowance may also be noted on your payslip

What is payroll accounting?

Payroll accounting is the process of recording all your employees’ compensation and the tax you have paid to the authorities. Good payroll accounting will mean you have a clear ‘paper trail’ of salaries, expenses and any bonuses you pay your staff, and means you can provide all information required to government auditors should they request it. Payroll accounting also involves noting all payments in your general accounts ledger to ensure you balance your books.

Payroll accounting is typically done monthly, but it can also happen more (or less) frequently, and involves tasks such as:

  • Recording all gross wages, salaries and bonuses
  • Deducting all taxes and sending these to the authorities
  • Calculating any exemptions for employees

Do I need a payroll management system?

Small businesses and start-ups may be able to get by with running payroll through spreadsheets and manually producing their employee’s payslips. However, this is hugely time consuming, and as a business grows it is normally a lot more effective to use an automated system which can carry out most of the calculations for you. The benefits are usually felt immediately:

  • Significantly cut the risk of data entry errors
  • Rapid processing of all payments
  • Automatic calculations of all relevant deductions
  • Frequent updates to make sure you are compliant with the latest legislation
  • Easy to use and secure software, plus digital payslips

If your company is growing, a modern payroll system can make the process of paying staff and the tax authorities a lot less painful. Find out how Sage’s HR and Payroll software can help make your payroll process fast and efficient.