How to calculate the tax on earning work after the issuance of the tax deduction law

How to calculate the tax on earning work 

The Egyptian Tax Authority has issued a periodic book on payroll tax, which explains how to calculate the tax and tax savings for each employee after the issuance of the tax deduction law.

  1. The circular was prepared to be circulated to the sectors of the Egyptian Tax Authority and its secretariats to implement the rules and provisions to facilitate the employees who address these provisions and to resolve any disagreement in this regard.
  2.  The Ministry of Finance confirmed in the memo that it considered the importance of seeking a tax incentive aimed at reducing the tax burden on the categories due, without wasting the tax revenue without a sound scientific justification.
  3. The ministry explained that the amount of the current exemption is 7,200 pounds per year is no longer enough for all categories of financiers addressing this tax and not only employees, and therefore any change in the exemption limit must include all categories so as not to face the text to challenge the unconstitutionality considering the severe distinction between the size of exemption granted For staff only.
  4. The first tranche has been increased from LE 7,200 to LE 8,000 and the second segment is more than 8,000 LE up to EGP 30,000, an 85% discount. The third tranche is more than LE 30,000 up to LE 45,000, a 45% discount, and the fourth segment is more than LE 45,000
  5. The tax exemption limit is LE 8,000 instead of LE 7,200 for the State Treasury, which is more than EGP 9 billion during the new fiscal year 2018/2019

How income tax is calculated

If the tax exemption limit is estimated at LE 8,000, in addition to an annual exemption of LE 7,000

the total income (8,000 annual exemption limit + 7,000 LE) is 15 thousand LE / year and is exempt from tax

According to the second tranche estimated at 10% and defined for the income of more than 8 thousand pounds to 30 thousand pounds, if we consider that the employee annual income of 20 thousand pounds

the tax payable on that income = [Total annual income - (8 thousand pounds exemption limit + 7 thousand job exemption ) ÷ 10% tax rate]                                                              = 500 pounds per year

According to the third tranche of 15%, which is defined as the income of more than 30 thousand pounds and does not exceed 45 thousand pounds, if we consider that the annual income of about 35 thousand pounds

 the tax payable = [total annual income - (8,000 pounds exemption limit + 7 thousand job exemption) ÷ 15% tax rate]                                                                       = 3 thousand pounds annually

According to the fourth tranche estimated at 20% of the annual income of more than 45 thousand pounds and does not exceed 200 thousand pounds, if we assume that the employee receives annually about 80 thousand pounds,                                                                         the annual tax amount on income = [total annual income - (8 thousand pounds exemption limit + 7 thousand job exemption) ÷ 20% tax rate]                                                              = 13 thousand pounds annually

The fifth and final tranche is defined as 22.5% for those whose incomes exceed the limit of 200 thousand pounds annually. The calculation of the tax, for example an employee who receives an annual amount of LE 100 thousand

his tax will be = [Annual income - (8 thousand pounds exemption limit + 7 thousand job exemption) ÷  22.5% tax rate]                                                                    = 19.125 thousand pounds annually.

Source: Akhbar Al Youm Newspaper

There is a practical case that illustrates the difference between the old law and the new law in the calculation of the employment tax for the annual exemption 

the segments as shown in the figure

 Note from the example

The first factor is that the value of social insurance is calculated annually or monthly because it is deducted when calculating the income tax. Then, we calculated the annual exemption in the old law (2015) in this example was (7,200 + 7,000 job exemption) In year 2018, we notice that the annual exemption (8,000 + 7,000 job exemption) shows the total salary paid by the employee during the year after deduction of insurance and exemption Since employee number (1) has exceeded the first tranche we calculate for him from 

    (second tranche (more than 8,000: 30,000            

 If the covered chip = 22,000✖️10% = 2,200 pounds ⇰

(Third slide (30,000: 45,000                    

 If the covered chip = 15,000✖️15% = 2,250 pounds⇰

(Fourth slide (45,000 : 200,000                     

      If the covered chip = 15,5000✖️ 20% = 31,000 pounds

( The fifth tranche ( more than 200000 LE, 22.5%             

The exempted segment = (22000 + 15000 + 155000) = 192000-744948 = 552948

Value of the slide = 552948 ✖️22.5% = 124413 pounds

Then the annual and monthly tax of the employee is calculated, which is the sum of the tax benefit of those segments covered by the  income tax and then the final stage is the calculation of the exemption of the segments and calculated as follow

  1.   From (8000: 300000) Exemption Ratio 85%
  2.   Of (30000: 450000) Exemption Ratio 45
  3.   Of (45000: 200,000) Exemption Ratio 7.5

In this example, Employee No. (1) is not exempted on the bins either in Employee No. (2) falls under the fourth tranche of 7.5% and employee number (3) falls under the second tranche of 85% and employee number (4) falls under the third tranche and amount 45%

After explaining the accounting method to calculate the income tax and the difference between it and the old law of 2005, we note that the new law took into account the social dimension of the employee and took the method of progressive tax in the calculation of income tax on the higher segments of income and provided the state budget income resulting from these differences and justice in calculating the tax