Question
What is the difference between the Final Deduction System and Pay As You Earn system (P.A.Y.E) of administrating tax on employment income?
Answer
The Final Deduction System and the Pay As You Earn (P.A.Y.E) system are two different methods of administering tax on employment income. Here is a concise comparison of the two systems:
Pay As You Earn (P.A.Y.E) System
Collection Method: P.A.Y.E is a system where tax is deducted from employees’ wages or salaries by employers at the time of payment. This system is not a method of assessing tax but a means of collecting it (Coleman, 1968; Murray, 1962).
Employer’s Role: Employers act as withholding agents, deducting tax based on instructions from the tax office and remitting it to the government monthly. They use tables provided by the tax office to determine the amount to be deducted (Coleman, 1968; Moosa, 2020).
Legal Framework: In the P.A.Y.E system, a tri-partite legal relationship exists among the tax authority, employers, and employees. Employers hold the deducted tax in trust for employees until it is remitted to the tax authority (Moosa, 2020).
Flexibility and Adjustments: The system allows for adjustments based on cumulative earnings and individual reliefs, ensuring that tax deductions align with the employee’s annual tax liability (Murray, 1962).
Final Deduction System
Collection Method: The Final Deduction System typically involves calculating the total tax liability at the end of the tax year, with the taxpayer responsible for settling any outstanding tax due.
Taxpayer’s Role: Unlike P.A.Y.E, where employers handle deductions, the Final Deduction System requires individuals to manage their tax payments, often resulting in a single payment at the end of the year.
Assessment and Payment: This system involves a final assessment of tax liability, which may require taxpayers to pay any difference between what was withheld and the actual tax owed.
Conclusion
The P.A.Y.E system is a proactive tax collection method involving regular deductions by employers, ensuring timely tax payments and reducing the burden on employees to manage their tax liabilities. In contrast, the Final Deduction System places the onus on individuals to settle their tax obligations at the end of the fiscal year, potentially leading to larger, less frequent payments.
References
Coleman, B., 1968. P.A.Y.E. and Tax Schedules. **. https://doi.org/10.1016/B978-0-08-012936-5.50022-8
Moosa, F., 2020. Consequences for Non-Payment of PAYE and VAT Compared. Potchefstroom Electronic Law Journal, 23, pp. 1-27. https://doi.org/10.17159/1727-3781/2020/v23i0a7791
Murray, A., 1962. British And American Systems Of Income Tax Withholding. Journal of Finance, 17, pp. 525-526. https://doi.org/10.1111/J.1540-6261.1962.TB04317.X
