The Employment Tax Incentive: What is it?

Employment Tax Incentive
The Employment Tax Incentive (ETI), initially introduced in 2014, was established to help alleviate the youth’s unemployment rate. This incentive was designed to combat the rising unemployment challenge by making it easier for employers to create job opportunities for young, less experienced individuals. In essence, this initiative incentivises small businesses to employ South Africa’s youth and takes the form of an incentive claimed by the employer, in respect of qualifying employees.

It is important to note that the incentive has no bearing on the remuneration paid to the employee, or on monthly PAYE to be collected by the employer from the employee on behalf of SARS. The incentive is calculated according to a set formula, it applies only in the case of certain conditions being met and the employer lodges the claim against this incentive.

The impact of the incentive is to ultimately reduce the business costs associated with hiring unqualified or inexperienced young employees. The money saved from this tax incentive can be redirected to cover other costs, provide funding for other business initiatives and strengthen investments.

In 2022, the minister of finance outlined that this tax benefit would be increasing to boost the SMME sector.

What this means for your small business

SARS has identified that millions of young South Africans suffer from the country’s record-high unemployment rate. As key contributors to economic growth, small businesses have a distinct opportunity to bridge the employment gap for the youth and provide opportunities for growth and the economic engagement of these job seekers.

This tax incentive offers deductions that can be claimed for the first 24 months of employment for employees between the ages of 18 and 29. The total return on this incentive can grow significantly depending on the total number of your employees, their future age profile and whether your business requires unskilled labour going forward. Despite the clear benefits, recent research has revealed that most small to medium-sized business owners are not using this incentive.

How does the Employment Tax Incentive work?

The incentive is calculated with reference to employee remuneration and duration of employment. It applies for the first two years of employ and is calculated as follows:

Year 1 Year 2
Monthly remuneration Employment Tax Incentive per month for the first 12 months of employment of the qualifying employee Employment Tax Incentive per month for the next 12 months of employment of the qualifying employee
R0 – R1 999,99 75% of Monthly Remuneration 37.5% of Monthly Remuneration
R2 000 – R4 499,99 R1 500 R750
R4 500 – R6 499,99 Formula: R1 500 – (75% x (Monthly Remuneration – R4 500) Formula: R750 – (37,5% x (Monthly Remuneration – R4 500)

Only employers registered for Employees’ Tax (PAYE) with SARS qualify for the ETI. Employers may claim the ETI for employees who:

  • Have a valid South African ID
  • Are aged 18 – 29 years old
  • Are not domestic workers
  • Are unrelated or unconnected to the employer
  • Earn a minimum wage under the wage regulating measures. Where no measure exists for the industry concerned, then the employee must earn at least R2 000 per month in wages or salary.
  • Earn less than R6 000 per month in total remuneration (basic salary plus all other benefits)
  • Were new appointments on or after 1 October 2013

The claims process involves the employer effectively decreasing the amount of PAYE for each qualifying employee, by populating the ETI field on the monthly EMP201 submission to SARS. 

Final thoughts

The responsibility for the administration of the Employment Tax Incentive lies solely with the SMME. In labour-intensive environments, the ETI represents a significant opportunity for small businesses to scale their activities, at potentially more affordable cost levels, if correctly calculated and administered. 

At MMS Cloud Accounting, we recognise the value of such incentives for our customers, and factor this into how we service the financial accounting needs of our small business clients. From daily management to monthly support, your business’s financial needs would be comprehensively covered through the comprehensive accounting services that we can offer to you – including the payroll needs of incentives such as the ETI. To ensure that your business benefits from all qualifying tax incentives, reach out to our team for more information.