Someone reached out to me a few weeks ago and wanted to check if they understood how the Pay As You Earn (PAYE) tax works in Zimbabwe. At the time I was writing an article about making personal finance personal which encouraged people to understand the personal finance terrain in Zimbabwe so they can make better choices. This got me thinking that while people know that PAYE is deducted from employment earnings they don’t quite get how it works and why it’s so complicated. We will explore the basics of PAYE and use some hypothetical examples to get a good understanding of PAYE.

PAYE

We all should somewhat understand the concept of income tax. You work and as a result of your earnings, you share your earnings with the government. The academic positions behind taxation are out of our scope here but it’s worth noting that tax proceeds fund government activities. PAYE is a direct tax, it is paid by the person who enjoys the benefit associated with it. PAYE is an individual tax, each individual stands for themselves though in certain circumstances deductions may be allowable based on other people you are connected to. Zimbabwean PAYE, as with many in the world works on a marginal tax system which is the focus of our discussion today.

Current PAYE Tax bands

According to the 2022 mid-term budget review statement the new PAYE bands are as follows.

Amount

Tax Rate

0-600000

600000

$600.000,00

0%

1440000

840000

$840.000,00

20%

2880000

2736000

$2.736.000,00

25%

5760000

2880000

$2.880.000,00

30%

12000000

6240000

$6.240.000,00

35%

12000000 and above

Remainder

40%

Marginal tax system

Marginal taxation systems work in a way that seems counterintuitive. Marginal tax breaks your income down into portions and applies a different tax rate to each portion of the income to arrive at a tax total. So when we say the highest income tax rate in Zimbabwe is 40%, it doesn’t mean the individual within that tax bracket pays 40% on their entire income. Rather they pay 40% on the part of their income that qualifies to pay 40%. If you’re formally employed and looked at your payslip trying to figure out how PAYE works we are about to break it down for you.

Practical example

Just before we get into it, we need to understand that what the minister announces are annual figures. So a tax-free threshhold of ZWL$600 000 is ZWL$50 000 per month. For tax purposes, the assumption is that your income is constant throughout the year so whatever you earn in a month will be pitted against the monthly breakdown of the tax bands. The same goes for weekly, fortnightly and daily earners where this applies. The table will make sense of this.

Lower

Upper

Annual Amount

Tax Rate

Tax due

0

600000

$600.000,00

0%

$0,00

600000

1440000

$840.000,00

20%

$168.000,00

1440000

2880000

$1.440.000,00

25%

$360.000,00

2880000

5760000

$2.880.000,00

30%

$864.000,00

5760000

12000000

$740.000,00

35%

$259.000,00

12000000

40%

$0,00

$6.500.000,00

$1.651.000,00

The table above shows a person who earns or is expected to earn ZWL$ 6 500 000 (six million five hundred thousand) during a calendar year. We are using the recently announced tax bands which doubled previous tax bands.

We can see here that the amount is divided into brackets and at each bracket, a different tax rate is applied. We have the total of the income at the bottom and the total taxation applied. For interests sake the effective tax rate (actual tax rate calculated as $1 651 000/ $6 450 000.00) is 25%.

Let’s look at another example to bring the point home. A person who earns ZWL$ 10 million in a year.

Lower

Upper

Annual Amount

Tax Rate

Tax due

0

600000

$600.000,00

0%

$0,00

600000

1440000

$840.000,00

20%

$168.000,00

1440000

2880000

$1.440.000,00

25%

$360.000,00

2880000

5760000

$2.880.000,00

30%

$864.000,00

5760000

12000000

$4.240.000,00

35%

$1.484.000,00

12000000

40%

$0,00

$10.000.000,00

$2.876.000,00

Again we see the same thing, the effective tax rate here is 29%.

Let’s look at someone earning 15 million;

Lower

Upper

Annual Amount

Tax Rate

Tax due

0

600000

$600.000,00

0%

$0,00

600000

1440000

$840.000,00

20%

$168.000,00

1440000

2880000

$1.440.000,00

25%

$360.000,00

2880000

5760000

$2.880.000,00

30%

$864.000,00

5760000

12000000

$6.240.000,00

35%

$2.184.000,00

12000000

$3.000.000,00

40%

$1.200.000,00

$15.000.000,00

$4.776.000,00

Our effective tax rate here is 32%. The observant amongst us would’ve noticed that for each bracket where a taxpayer reaches the maximum amount the tax does not change. Notice that our 6.5 million, 10 million and 15 million earners all paid the same amount between ZWL$600 000 and ZWL$ 1 440 000. When calculating marginal tax these rates are given to us by ZIMRA and all we ever need to calculate is the amount in the final bracket where their income exhausts. Using the figures below.

Lower

Upper

Annual Amount

Tax Rate

Tax due

0

600000

$600.000,00

0%

$0,00

600000

1440000

$840.000,00

20%

$168.000,00

1440000

2880000

$1.440.000,00

25%

$360.000,00

2880000

5760000

$2.880.000,00

30%

$864.000,00

5760000

12000000

$6.240.000,00

35%

$2.184.000,00

12000000

+

Excess over 12000000

40%

40% of Excess

$3.576.000,00

+ 40% of Excess

So all we need for our 6.5 million dollar earner is;

0+168000+360000+864000+(740000*35%)=1651000

Our 10 million dollar earner’s annual PAYE is calculated as;

0+168000+360000+864000+(4240000*35%)=2876000

And our 15 million dollar earner

0+168000+360000+864000+2184000+(3000000*40%)=4776000

Of course, for many PAYE is calculated on a monthly rather than an annual basis. As discussed before we simply divide all annual figures by 12 because the assumption is that income is earned evenly throughout the year. If we turn our final example’s annual income into a monthly income we see the following;

Lower

Upper

Annual Amount

Monthly Amount

Tax Rate

Tax due

0

600000

$600.000,00

$50.000,00

0%

$0,00

600000

1440000

$840.000,00

$70.000,00

20%

$14.000,00

1440000

2880000

$1.440.000,00

$120.000,00

25%

$30.000,00

2880000

5760000

$2.880.000,00

$240.000,00

30%

$72.000,00

5760000

12000000

$6.240.000,00

$520.000,00

35%

$182.000,00

12000000

$3.000.000,00

$250.000,00

40%

$100.000,00

$15.000.000,00

$1.250.000,00

$398.000,00

Which of course could’ve been calculated using the short method;

0+14000+30000+72000+182000+(250000*40%)=398000

One more thing to note is the AIDS Levy, an additional 3% of the PAYE due. So in our last example, it would be 3% of ZWL$398 000 (ZWL$11 940). The key here is to understand the marginal tax system and how it works. As you earn more, you progressively pay more in PAYE. It’s a lot but if you run through the examples we have here a few times with your calculator you will have the hang of it. Then try it with your earnings. Just don’t divide your RTGS salary.