Uganda: Adjustment of PAYE return for secondary employment income

The Uganda tax authority issued a public notice outlining changes made to the “pay as you earn (PAYE)” return concerning secondary employment income. 

Under Schedule 1 of the PAYE return on the tax authority’s online portal, the tax rate for computation of PAYE for employees subject to “fixed rate” has been adjusted to include 40% of the taxable secondary employment income earned by employees (effective 4 October 2022).  

Previously, the monthly PAYE return only provided for a fixed rate of 30% (irrespective of the amount paid to the employee) for persons who earned taxable employment income from more than one employer (secondary employment). 

From the notice, the PAYE return has been updated to include the 40% fixed rate to be applied to monthly secondary employment income, but only to the extent such income exceeds UGX 10 million. 

Tax professionals note that a resident employee is entitled to one tax threshold (UGX 235,000 per month) that is not taxed and the tax authority assumes that this has already been granted by the employee’s primary employer when accounting for PAYE. 

Based on this assumption, the tax authority requires the second or any other employer to apply a fixed rate of tax to the employee’s chargeable income earned for the month as shown in Schedule 1 of the monthly PAYE return.

Upon the implementation of this adjustment, the PAYE return now allows for both 30% and 40% fixed rates on taxable employment income earned from secondary employment, depending on the amount paid to the secondary employee. When the employee’s employment income exceeds UGX 10 million, the fixed rate applicable is 40%. However, when the employee’s employment income is less than UGX 10 million, the fixed rate of 30% applies. 

The adjustment in the PAYE return neither introduces a new tax nor increases the tax rate for both primary and secondary employment income. Rather it allows secondary employers to account for tax at a fixed rate of 40% on monthly employment income above UGX 10 million. 

The new change is likely to affect individuals such as directors who may serve on boards of different companies and thus have several sources of monthly emoluments. 

For the tax authority, the new change is expected to resolve the apparent gap in tax compliance and potentially address the deemed “under-collection” of PAYE in the past by the revenue authority.

Tax professionals also note that although the secondary income is taxed at a fixed rate of either 30% or 40%, it may not mean that the fixed rate is the actual rate to be imposed on the employee’s income earned in that year. This is because the PAYE return adjustment does not take into consideration the annualization of one-off or irregular payments. As such, an individual earning in excess of UGX 10 million for one month in a year of income may pay more tax than they ought to have paid.

Read an October 2022 report prepared by the KPMG member firm in Kenya