Pay As You Earn (PAYE) is a method of income tax collection in which an employer deducts tax from an employee’s wages or salary at the time it is paid and remits it directly to the tax authorities. This system ensures that taxes are collected regularly and systematically as the employee earns income, rather than being paid in a lump sum at the end of the tax year. PAYE is used in many countries, including Kenya, to streamline the process of tax collection and compliance.
Key Features of PAYE
- Source Deduction: Taxes are deducted at the source, meaning they are taken out of the employee’s paycheck by the employer before the employee receives it.
- Regular Collection: Taxes are collected regularly, typically each pay period (weekly, bi-weekly, or monthly), aligning with the employee’s earnings schedule.
- Employer Responsibility: The employer is responsible for calculating, deducting, and remitting the correct amount of tax to the tax authorities.
- Progressive Tax Rates: PAYE often involves progressive tax rates, where the tax rate increases with higher levels of income. This ensures that higher earners pay a larger proportion of their income in taxes.
- Withholding Allowances and Deductions: Employers consider various allowances and deductions when calculating PAYE. These may include contributions to pension plans, health insurance premiums, and other allowable deductions.