Question EMMANUEL Social Sciences

Distinguish between Final Deduction System and Pay As You Earn system

Distinguish between Final Deduction System and Pay As You Earn system (P.A.Y.E) of administrating tax on employment income

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Answer Internal Staff

Pay As You Earn system is how employees pay income tax as well as national insurance. The tax is paid over the course of the year, each time the employee is paid, rather than a large one-time tax payment. Under this system, employers administer the P.A.Y.E. system, but at the end of the tax year, the Tax Department reviews the same P.A.Y.E to check for income tax variances. This system can result in the replication of similar processes, as a result resources are tied up in verifying the final tax liabilities.

The Final Deduction System solves the difficulties linked with the P.A.Y.E system. Final Deduction System is a system by which the employer is administered to withhold Employees Tax (P.A.Y.E) from the employee’s payment, to ensure that the amount withheld monthly and in the year of assessment is almost equivalent as the income tax liability that is anticipated from the employee concerned. Under this system, the employee whose income consists only of employment income will not submit returns after the end of the year if they are employed by a single employer during the year.