One of the ways in which the government is helping to alleviate the staggering youth unemployment rate in South Africa, is by means of the Employment Tax Incentive (ETI), which was introduced at the beginning of 2014. Ultimately, the ETI reduces the cost of hiring young people by allowing employers to pay less Pay-As-You-Earn (PAYE) tax on behalf of qualifying employees. In the 2022 Budget Speech, the Minister of Finance announced an increase in this tax benefit, as a measure that the state is taking towards boosting the small and medium-sized enterprise (SME) sector.
The ETI forms part of the government’s drive towards solving the rising unemployment challenge by enabling employers to create more employment opportunities for young less experienced work seekers. For cash-conscious SMEs, the ETI can produce a welcomed return on employment that can be invested back into the business to cover other costs, provide for employee incentives and pay for training and team building.
However, according to research conducted by payroll specialists, Sage, only just over half of South African SMEs currently take advantage of the ETI. For the most part, this finding was linked to a general lack of awareness of the ETI and how it can be used to generate positive returns.
Below is a snapshot of what the ETI is and what its implications are for South African SMEs.
An outline of the ETI
The tax benefit applies to employees between the ages of 18 and 29 years old (a number of caveats apply) and may be claimed for the first 24 months of their employment. As of March 2022, the following formula applies:
||Formula for First 12 Months
||Formula for Second 12 Months
|R0 to R1 999,99
||75% of monthly Remuneration
||37,5% of monthly Remuneration
|R2 000 to R4 499,99
|R4 500 to R6 499,99
||R1 500 –75% x (monthly remuneration – R4500)
||R750 –37.5% x (monthly remuneration – R4 500)
How the ETI works
It is the SMEs responsibility to administrate the process around the ETI. The calculation for each employee must be done as part of the SMEs payroll system by deducting the total ETI calculated according to each employee’s remuneration, from the total PAYE payable to SARS.
If an SME employs three qualifying employees who earn R4000, R5000 and R6000 respectively, in the case of the first employee, the tax benefit will amount to R1500. The tax benefit for the second employee will be calculated as follows: R1500 – (75% x (R5000-R4500)) = R1125. The calculation for the third employee will be: R1500 – (75% x (R6000 – R4500)) = R375. Therefore, at the end of the tax year, the tax benefit that the SMEs will be allowed as a deduction from the PAYE liability under the ETI will amount to R36 000 (R3000 X 12) in total for the year.
An opportunity for SMEs
According to SARS, millions of young South Africans are currently excluded from participating in economic activity and suffer disproportionately from South Africa’s record-high unemployment rate. Youth unemployment in and of itself, is a national crisis that will have widespread and far-reaching effects in the long term. Small businesses, as key contributors to GDP, have a unique opportunity to equip young people with the skills, training and knowledge they need to become economically active citizens.
The advantages of hiring young people
Research has shown that there is a business case to be made for employing young people. Underpinning this argument is the fact that employers across multiple sectors have found that young people are more willing to learn than their older counterparts. They also demonstrate the ability to produce fresh ideas and take new approaches to solving problems within the workplace. Where young people are qualified, they also bring new skills into the business that are more in line with the most recent technological developments.
Bringing young people into the SME workforce also contributes towards company diversity, which for some businesses, is more representative of their customer base. There is great strength to be found in this kind of diversity, which engenders an environment that is open to different perspectives, skills, expertise and experiences.