Employment Tax Incentive (ETI) – What’s it all about?

President Cyril Ramaphosa emphasised the importance of the government’s role in fostering economic growth so that businesses can generate much-needed jobs in South Africa at this year’s State of the Nation Address (SONA).

Since South Africa’s unemployment rate reached 34.9% in Q3 2021, there is an urgent need to improve policies and regulations to promote business growth and encourage entrepreneurship. The rising number of young people without jobs in South Africa is quite alarming, especially for those without tertiary education.

To encourage more businesses to create new job possibilities, the state must examine the current restrictive regulatory environment. Some would argue that this review has been necessary for some time.

However, an existing and remarkably underused business tax incentive exists to encourage companies to hire more young workers. This is called the Employment Tax Incentive (ETI).

Without impacting individual employee wages, the ETI lowers the employer’s overall Pay-As-You-Earn (PAYE) contribution.

During the 2022 Budget Speech, it was announced by finance minister Enoch Godongwana that there will be an increase in the ETI values from 1 March 2022.

What is the ETI?

The Employment Tax Incentive (ETI) allows South African businesses to claim a PAYE tax rebate for employees between the ages of 18 and 29 who earn a gross salary of less than R6500 per month. The ETI aims to boost the employment of young job seekers.

An employee is eligible for the ETI if they:

  • work for the business helping with business operations, and they are paid for their services;
  • are recorded in employer records under the provisions of Section 31 of the BCEA;
  • are paid at least the minimum wage;
  • are employed in a special economic zone, or they are between the ages of 18 and 29, and;
  • they possess a valid South African ID, a valid permit for asylum seekers, or an ID as defined by Section 30 of the Refugees Act.

An employee will not be eligible for the ETI if they:

  • are a domestic worker;
  • are a “connected person” to the employer;
  • spend more time studying than working (unless the employer and employee have entered into a learning programme as defined in Section 1 of the Skills Development act, or;
  • earn a monthly remuneration of R6500 per month or more.

How does the ETI work?

As an employer, you can hire five employees between the ages of 20 and 25 and pay them R4000 per month. For these five employees, the total monthly salary is R20000.

In the first 12 months that the employees are eligible, you can subtract the equivalent of R7500 from your total monthly PAYE liability thanks to the ETI. In the second 12-month period during which the employees are eligible, you may deduct R3750. Your employees’ wages will remain completely unaffected.

The ETI is administered by the employer. In other words, the calculations are done by your payroll system, and the employer is required to deduct the total ETI for the month from the total PAYE payable to SARS.

What makes the ETI so beneficial is that both employers and employees are rewarded. Employers receive a tax benefit, and young employees gain valuable skills and experience in the workplace. This results in private sector growth and the economy strengthening.

However, there are still many companies that are unaware of the ETI and how it works.

However, like any tax benefit, the ETI does have certain parameters. An employee can only qualify for ETI for 24 months from employment with the associated business – these 24 months do not have to be consecutive, and only qualifying months count towards the 24 months. Applying the ETI as soon as you hire an eligible employee is crucial because the incentive falls away after the 24 qualifying months and cannot be backdated.

Furthermore, it is important to note that SARS pays close attention to ETI applications and occasionally conducts audits. This isn’t meant to scare you away from the ETI, but rather to highlight how crucial it is to have a current, sensible payroll system or a trusted payroll outsourcing partner who understands the intricacies of the qualification criteria and the rather complex ETI calculation.

To qualify for ETI, your business must pay PAYE through the salaries of its more senior employees. Speak to one of our trusted Associates to help you figure out whether the ETI can be of benefit to your company and whether you qualify. Find our Associates here.

SMEs please take note of this extremely helpful benefit to assist you in growing your business. We urge you to explore the ETI as you stand to gain substantially.