The basic method used to calculate the monthly PAYE for annuities (ignoring, for ease of explanation, considerations such as pro-rata payments, bonus, arrear increases and arrear instalments), is summarised below.
Note:
For Swaziland tax, refer to
Client Specific
PSPF
Annuity Tax Computation Method
Annuity Tax Computation Method
For details of scenarios where the payment start date has an influence in determining the tax period, therefore affecting the way in which tax is calculated, refer to
Supplements
Use of Payment Start Date for Annuity Tax Calculation
Method of calculation
Tax Year Period
Obtain the tax period as follows:
|
Tax Year (CCYY) |
= |
the year for which the run is being done (a parameter of the run) |
|
Tax year-end day and month (DD/MM) |
= |
the day and month captured on the JU1BF Benefit Payment Tax Group Maintenance screen |
Therefore
Last day of tax year = DD/MM/CCYY
First day of tax year = Last day of Tax Year + 1 day – 1 year
Annualisation Factor
If an annuity is launched mid-way through the tax year, the tax needs to be calculated on an annualised income, and then adjusted downwards to reflect the amount due for the part of the tax year that the annuity is in force.
Annualisation factor = number of months the annuity is in force / 12
Projected Taxable Income
Monthly Taxable Income (taxable portion of current month’s annuity)
Multiplied by Number of months left in the year
Plus Income earned to date
Divided by Annualisation factor
= Projected taxable income for the year
PAYE for Current Month
Estimate of tax for the year (based on projected taxable income for the year)
Multiplied by Annualisation factor
Less Tax paid to date
= Tax due for remainder of year
Divided by Number of months left in the year (including current month)
= PAYE due for current month
Further adjustments for pro-rata payments, bonus, arrear increases and arrear installments are covered below.
Taxable Monthly Income to Date
Taxable monthly income to date is the cumulative taxable monthly income that was paid and taxed in the current tax year prior to the current month, excluding any such income that may have accrued in the previous tax year (e.g. arrears instalments and/or increases, which, if having accrued in the previous tax year, are treated as annual income).
If the current month is the first month of the tax year, or, in the case of a new annuity, the first month that the annuity is being paid, then taxable monthly income to date is equal to zero.
Annual Payments to Date
The following are regarded as annual payments:
- bonus
- arrears annuity instalments that accrued in the previous tax year
- arrears annuity increases that accrued in the previous tax year
Let annual payments to date = the total of the above items, paid and taxed prior to the current month
Arrears Income (Current)
Arrears income can arise when:
- an annuity increase is applied late (i.e. with effect from one or more months previously)
- an annuity is loaded onto the system late, so that not just the current month's annuity instalment, but also previous months' need to be paid.
Arrears income = annuity increases (as yet untaxed) for months prior to the current month (excluding increases that accrued in the previous tax year)
plus
unpaid annuity instalments (as yet untaxed) for months prior to the current month (excluding instalments that accrued in the previous tax year)
Projected Taxable Income
Let:
Annualisation factor = number of months (including fractions) in the tax year that the annuity is in force / 12
(If the annuity is launched in the middle of a month, so that a pro-rata payment is paid in the first month, then the number of months would include the fraction of the first month that the annuity is payable).
Monthly income = taxable income for a full month based on the rate of income for the current month.
Projected taxable income for the year =
Monthly income multiplied by the number of months (including fractions thereof) from the current month until the last month of the tax year (inclusive).
Plus Arrears income (current)
Plus Taxable monthly income to date (refer to Arrears Income (Current) above).
Divided by Annualisation factor (refer to Taxable Monthly Income to Date above)
Plus Annual payments to date (refer to Annual Payments to Date above).
Projected Tax
The projected tax for the year (including previous annual payments but excluding any current annual payment) is calculated by referring to the stored table of rebates and marginal rates using the projected taxable income (refer to Projected Taxable Income above). Refer to
Infrastructure
System Data
Tax Tables
If the annuity commenced after the start of the tax year, then adjust the projected tax as follows:
Subtract tax paid on annual payments
Multiply by annualisation factor
Add tax paid on annual payments
Note:
For the purposes of calculating tax on annual payments (refer to Tax on Annual
Payments below), the unadjusted projected tax is needed, so that both values should
be stored.
Tax to Date
Tax to date is the total tax actually paid prior to the current month, inclusive of tax paid on annual payments.
If the annuity has been in force since the beginning of the tax year or, in the case of a new annuity, has been in force for part of the tax year prior to the run month, then tax to date is equal to the cumulative tax paid for the months prior to the current month (starting from the beginning of the tax year).
If the current month is the first month of the tax year, or, in the case of a new annuity, the first month that the annuity is being paid, then tax to date is equal to zero.
PAYE for the month
Projected Tax for the year (refer to Projected Tax above)
Less Tax paid to date (see Tax to Date above)
= Tax due for remainder of year
Note:
If the scheme is one that makes advance provision for tax on bonus, then add the cumulative tax provision (CTPc-1), (as described in Monthly Process (Prior to and including Bonus Month) below) to the tax due for the remainder of the year (unless c is after the bonus month).
Let
Future Income = Monthly income multiplied by the number of months (including fractions thereof), from the current month until the last month of the tax year (inclusive).
Future Income
Plus Arrears Income (current) (see Arrears Income (Current) above)
= Total Income due for remainder of year (including current month)
PAYE for the month = (Tax due for remainder of year)
multiplied by (Current month’s income + Arrears Income)
divided by (Total Income due for remainder of year)
Note:
If the scheme is one that makes advance provision for tax on bonus (refer to Advanced Provision for Tax on Bonus below), then add the tax provision (TPc , as described in Monthly Process (Prior to and including Bonus Month) below) to the PAYE for the month. If c is after the bonus month, then TPc will be zero, so there will be no effect.
In addition to the regular and arrears monthly payments (accruing in the current tax year), it may be necessary to calculate the tax on what are regarded as annual payments. This calculation may need to be applied many times during the year, i.e. whenever an annual payment event occurs, and is based on the annuitant’s marginal rate.
The following are regarded as annual payments:
- bonus
- arrears annuity instalments that accrued in the previous tax year
- arrears annuity increases that accrued in the previous tax year
The tax on annual payments is calculated as follows:
Projected taxable income = amount calculated in Projected Taxable Income above.
Projected tax for the year (based on projected taxable income) is calculated by referring to the stored table of rebates and marginal rates using the unadjusted projected taxable income (refer to Projected Tax above).
Refer to
Infrastructure
System Data
Tax Tables
Adjusted projected taxable income =
Projected taxable income
Plus
Annual payments arising in the current month
Adjusted projected tax is calculated by referring to the stored table of rebates and marginal rates using the adjusted projected taxable income.
Refer to
Infrastructure
System Data
Tax Tables
Tax on annual payments =
Adjusted projected tax
Less
Projected tax
Calculation Parameters
The notation and conventions used in the calculation specification are as follows:
Let the nth month refer to the nth month of the tax year (and not the calendar year), so that, if the tax year-end month is February, then the 1st month will be March and the 12th month will be February.
|
TPi |
= |
Tax Provision calculated in the ith month |
|
CTPi |
= |
Cumulative Tax Provision calculated in the ith month i.e. TP1 + . . . .TPi-1 + TPi |
Therefore: CTPi = CTPi-1 + TPi
(If the pension remained constant throughout the year, then TPi would be constant for all values of i. However, if the annuity is increased at any time in the year, then the value could change).
TPi and CTPi are stored in database fields. At the beginning of the tax year TPi and CTPi are set to zero for all values of i.
The value for provision for tax on bonus on each current payment detail record for the member is read. If the value is Y (Yes) the Regular Payment Amount in the total amount on which the tax provision is calculated is included.
The Tax Provision Period is determined using the tax year and the scheme parameter, bonus date.
Effective_Provision_Period is calculated as follows:
- check the effective date of the bonus date scheme parameter.
- if the bonus date effective date is prior to the last tax year-end and if the annuity commenced in the tax year-end month or earlier, then Effective_Provision_Period = (bonus date month – tax year-end month – 1).
- if the bonus date effective date is after the last tax year-end and if the annuity commenced in the tax year-end month or earlier, then Effective_Provision_Period = (bonus date month – bonus month effective date) – 1.
- if the bonus date effective date is prior to the last tax year-end and if annuity commenced after the tax year-end month, then Effective_Provision_Period = (bonus date month – annuity start date month) – 1.
- if the bonus date effective date is after the last tax year-end and if annuity commenced after the bonus date effective date, then Effective_Provision_Period = (bonus date month – annuity start date) – 1.
Note:
For the purposes of calculating tax provisions, any month where a full annuity payment was not made is ignored (e.g. where a pro-rata payment was made in the first month owing to a retirement that took place in mid-month).
Monthly Process (prior to and including Bonus Month)
For each month prior to the bonus month, process as follows:
Let: b = bonus month
c = current month
Assume that the bonus will be paid in the current month (rather than in the bonus month), and is equal to one month's pension (refer to Ex Gratia Income below).
Calculate the tax on the bonus, as set out in this document. However, do not include the tax thus calculated in the tax that is to be paid in the current month. The result is held separately in an Estimated_Bonus_Tax field.
Tax_Outstanding =
if c>1
Estimated_Bonus_Tax
Multiplied by
(Effective_Provision_Period / Tax_Prov_Period)
Less
CTPc-1
if c=1
Estimated_Bonus_Tax
Multiplied by
(Effective_Provision_Period / Tax_Prov_Period)
TPc = Tax Provision for the Current Month
= Tax_Outstanding / number of months remaining
= Tax_Outstanding / ( b – c + 1)
Add TPc to the PAYE for the month
CTPc =
if c>1
CTPc-1 + TPc
if c=1
TPc
Bonus Month’s Process
Where advance provision is made for tax on bonus, and where such provision is made from the first month of the tax year, it is not necessary to calculate the tax on the bonus in the bonus month since the total tax on the bonus will have been covered via the monthly advance provisions (including the provision calculated in the bonus month). However, if the provisions commenced after the start of the tax year, then the provisions will not fully cover the tax due on the bonus.
Where provisions commence after the start of the tax year, calculate the tax on the bonus using the method specified in Tax on Annual Payments above. From the result obtained, subtract CTPb
Subsequent Months' Process
In each of the months after the bonus month, processing is as for any month where tax provision for bonus does not apply, i.e. the normal process should be followed.
Where the annuitant is paid an ex gratia monthly payment in addition to the monthly pension, the two monthly amounts may be added together and treated as a single payment for purposes of calculating tax. Therefore, where the bonus is one month's pension plus one month's ex gratia income, the two payments may be added together and treated as one.