Guide to payroll for African businesses

What is PAYE?

Pay as You Earn (PAYE) is a system of personal taxation, where the employer deducts tax from employees’ payslips, before sending this to the relevant tax authorities.

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

PAYE makes it easier for governments to collect income tax revenue. Without PAYE, all individuals would have to complete their own annual tax returns. This would give governments less regular income and creates potential for human error and fraud.

PAYE systems vary from one country to the next, and reflect the different tax bands set by their governments. In some countries, there is no tax on initial earnings, while others don’t have any tax-free allowances. In Ghana, for instance, the first 3,132 GH¢ are not taxed, but you will pay tax on all earnings above that amount. By contrast, Kenyans pay 10% tax on their first 1,298 Shillings, then 15% on the next 11,587 Shillings, and so on.

Making sense of your payslip

Payslips can be confusing, with their curious codes and unexplained figures. Often, employees are unsure as to why certain deductions were made.  Here are common details found on most payslips:

• Gross pay: This is your initial pay before PAYE deductions.

• Net pay: This is your ‘take home’ pay – the money you receive after tax.

• Payroll number: Your company issues everyone with a payroll number.

• Your tax code: Authorities will assign you a tax code. This depends on your employment situation and other factors (like how many jobs you have, your marital status, etc).

• Deductions: This is a list of all tax collected by your employer on behalf of the tax authorities.

• Sick pay and other leave: Sick pay and maternity/paternity leave.

• Other benefits: Bonuses, overtime, company perks, and other benefits.

• Exemptions and reductions: In some countries, various exemptions and tax relief may be noted on your payslip. In Nigeria, for instance, reductions for costs like dependent family, children, or medical allowance reflect on payslips.

If in doubt, ask your company’s accounting department.

What is payroll accounting?

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

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

• Recording gross wages, salaries, and bonuses;
• Deducting taxes and sending these to the authorities; and
• Calculating 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 employees’ payslips. However, this is hugely time consuming and, as a business grows, it’s more effective to use an automated system that can do most of the calculations for you. Immediate benefits include:

• Significantly reduced risk of data entry errors;
• Rapid processing of payments;
• Automatic calculations of relevant deductions;
• Frequent updates to make sure you comply with the latest legislation;
• Easy-to-use and secure software, and
• Digital payslips.

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

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