Well, we know the topic of today’s article may have got you confused a little bit, but don’t worry, you will be settled by the time you finish reading. Most of you may know that individuals are taxed at sliding scales and any income above P13,000/month or P156,000/annum is taxed at 25 percent. So, that alone gives people the impression that high-income earners pay tax at 25 percent. Well, that is not entirely true as there is something called the effective tax rate, which we will analyse in more detail below. Words importing the masculine shall be deemed to include the feminine.
Personal tax brief
Personal tax is tax that is levied on income earned by an individual, whether from employment, investments, partnerships or from a business run by a sole trader. Technically, personal tax is a direct tax that is chargeable on a particular individual based on the income that they earn. Employees get PAYE deducted on a monthly basis by their employers, but that is income tax in their hands. Individuals are taxed using the individual tax tables which exempt the first P48,000/annum from tax. This explains why employers don’t deduct PAYE from employees who earn not more than P 4,000/month.
Effective
There is something which we call the effective tax rate. This is not anything complicated, but it is merely an expression of the total tax charge as a percentage of the total income earned by a taxpayer. We narrate below the reasons why no one in this country ever pays personal tax at an effective tax rate of 25 percent. Firstly, the first P48,000 is exempt from personal tax. Now, that has the effect of pulling down the effective tax rate, as not all your income is subject to tax. In other words, the first P48,000 is taxed at 0 percent. Secondly, any amount above the first P48,000 is taxable, but again, the rates are much lower than 25 percent, being 5 percent to 18.75 percent. You don’t have to be a rocket scientist to understand the above; all we are saying is that there are layers of lower tax rates below the 25 percent threshold, and the effect of that is a reduced effective tax rate. So, the fact we are making is that whilst the tax tables show 25 percent as the tax rate applicable at the highest bracket, no one pays tax at that rate, if looked at from an effective tax rate view.
Back to school
By way of conclusion, let us use figures to show you the effective tax rates for some income. For example, a person who earns P1 million a year pays tax at an effective tax rate of 24.7 percent, being P224,000. Now, that person is arguably a high-income earner, and despite the fact that their income is significant, they actually don’t pay 25 percent tax of their income. It is lower than 25 percent because of the exempt P48,000 as well as the staggered tax rates as we go up the income tax tables from 5 percent to 18.75 percent.
Tax hint & cheers
If you have never had a tax audit conducted on your business by a tax firm, we highly recommend that you consider such so as to proactively reduce tax gaps. As we say goodbye, remember to pay Caesar what belongs to him. If you want to consult, join our free Tax WhatsApp group or to know about our 9 Tax e-books, send a text to +267 7181 5836 or email us at jhore@aupracontax.co.bw. You can read more tax articles on our website, www.aupracontax.co.bw, under the ‘Tax articles’ tab.
