Tax Calculations
For the countries that Kwik-Pay directly supports, the pay items to calculate tax and other statutory deductions and the rates at which they apply, are pre-defined and updated each year to keep the software up to date with the statutory requirements. Kwik-Pay adds tax pay items automatically to the pay calculations and the amount calculated according to the tax tables applicable on the pay date.
Kwik-Pay Generic Tax Calculation
For other countries, Kwik-Pay provides a generic tax pay item called PAYE, and example tax rate tables for sample tax scales:
- Primary - a banded tax table for employees' primary employment
- Secondary - a banded tax table to be applied where the employee's pay is for secondary employment. i.e. they have another full-time job elsewhere as their primary employment
- No Declaration - a single punitive rate applied where the employee has not provided tax references
- No Tax - forces no tax to be deducted from the employee's pay
As the tax tables are only example tables and Kwik-Pay will not provide any updates for your country's requirements, you will need to modify the tables yourself and keep them up to date. Select tax codes and tax rates to update the codes and rates for your own requirements.
PAYE Generic Tax Calculation
The default PAYE pay item has the calculation type set to PAYE which has the following steps:
- Calculate taxable pay The total of all pay items that have a Tax Category of 'Income' are accumulated for the pay
- Check employee fixed rate If the employee has a fixed, over-riding tax rate entered in the employee details, tax conditions screen, that rate is applied to the taxable pay. If the employee has the tax scale 'No tax', no tax is calculated.
- Convert taxable total to an annual amount The taxable pay is converted to an annual amount depending on the employee's pay frequency by converting to a weekly amount first, rounding down to the nearest lower whole number and the result is then multiplied by 52 to give the annual amount.
- Find tax rate for annual pay amount The tax rate applicable for the annual amount is retrieved by finding the first tax rate with a 'lower limit' less than the annual pay amount.
- Calculate annual tax The annual tax amount is calculated by subtracting the tax rate 'lower limit' from the annual pay amount and multiplying the result by the tax rate, and then adding the tax rate 'cumulative amount'. The tax rate 'cumulative amount' is the amount of tax payable for all pay below the 'lower limit' for the tax band.
- Convert annual tax to pay period amount The calculated annual tax amount is converted back to a pay period amount by dividing by 52, if the employee's pay frequency is weekly, or for a monthly amount is divided by 52 multiplied by 13 and then divided by 3. The result is then rounded down to 2 decimal places.
- Apply employee percentage If the employee has a '% of normal tax' value set, the calculated tax is marked up by the specified percentage. For example if the '% of normal tax' is 120, the calculated tax is multiplied by 1.20 or if the '% of normal tax' is 60 the calculated tax is multiplied by 0.60
PAYE Year To Date Generic Tax Calculation
An alternative calculation method is available to provide a year to date averaging of the tax calculation. This calculation method is used when the PAYE tax item has a calculation type of 'PAYE YTD'. The generic 'other countries' version of Kwik-Pay includes both a 'PAYE' and 'PAYE YTD' pay item, and when the employee tax conditions screen, 'Year to date tax calculation' checkbox is ticked the 'PAYE YTD' pay item will be added to the employee's pay automatically, but if the checkbox is blank, the 'PAYE' pay item will be added to the employee's pay.
If the PAYE YTD tax calculation is selected, the tax calculation is based on an averaged year to date total of the employee's pay:
- Calculate year to date pay The total of all pay items in all pays since the start of the tax year are accumulated where the pay item has a Tax Category of 'Income'.
- Calculate number of pay periods The number of pay periods is calculated from the start of the tax year or employee's start date, whichever is later up to the current pay date.
- Calculate average taxable pay The total taxable pay in the tax year, including this pay, is divided by the number of pay periods.
- Calculate tax for period The tax is calculated for the period using the generic tax calculation above
- Convert tax amount to annual amount The tax amount calculated for the average period's pay is multiplied by the number of pay periods
- Tax year to date reduced by tax already deducted The total of tax deducted for previous pays in the year to date is then subtracted from the tax calculated on the total pay year to date and the result is the tax for the current pay period.