Human Resources
<p>"What is your CTC?" is one of the first questions asked in a salary discussion. Employers and employees often use the term differently, and that causes problems.</p><p>An employee thinks of CTC as their salary. The employer thinks of it as the total amount the employee costs the business. Neither is wrong, but they are not the same thing.</p><p>This article explains what CTC is, what it includes, how it differs from gross pay and net pay, and the related terms every employer should understand.</p><h2>What Is Cost to Company?</h2><p>Cost to company is the total yearly cost of an employee to the employer. It brings the employee's cash pay, the employer's contributions and the value of benefits into one figure.</p><p>CTC is the employer's cost. It is not the employee's take-home pay.</p><h2>What Does a CTC Package Include?</h2><p>The exact make-up depends on the contract and on how the employer defines the package. A CTC package usually includes:</p><ul><li><p>basic salary;</p></li><li><p>employer contributions to a retirement fund;</p></li><li><p>employer contributions to a medical scheme;</p></li><li><p>the taxable value of benefits such as a company car;</p></li><li><p>allowances and other fixed payments; and</p></li><li><p>depending on the employer's definition, employer UIF and SDL.</p></li></ul><p>Check the contract and the remuneration letter to see what is included in the package. Two employers can use the term CTC and mean different things.</p><h2>How a CTC Package Works</h2><p>In a CTC structure, the employer and the employee agree on a total figure. The employee can then choose how that total is split between cash salary and benefits, such as retirement fund and medical aid contributions.</p><p>The split can change. The employer's total cost stays the same.</p><p>For example, if an employee decides to put more of the package into the retirement fund, the cash salary goes down by that amount. The package total is unchanged.</p><p>This is why CTC packages are popular with employers. The cost of the employee is known and fixed, and the employee has some flexibility.</p><h2>An Example</h2><p>An employee has a CTC of R50,000 a month. It is split as follows:</p><ul><li><p>cash salary: R35,000;</p></li><li><p>employer medical aid contribution: R5,000;</p></li><li><p>employer retirement fund contribution: R5,000; and</p></li><li><p>company car benefit: R5,000.</p></li></ul><p>The employer's cost is R50,000. The employee will not receive R50,000 in the bank. PAYE, the employee's UIF contribution and the employee's own contributions are deducted first.</p><h2>CTC, Gross Remuneration and Net Pay</h2><p>These three terms are often confused.</p><h3>Cost to Company</h3><p>The total cost of the employee to the employer, including employer contributions and the value of benefits.</p><h3>Gross Remuneration</h3><p>The employee's total earnings before deductions. This is the starting point for calculating PAYE, UIF and SDL.</p><p>CTC sits above gross remuneration. It includes everything in gross remuneration plus the employer costs that are not part of the employee's pay, such as the employer's UIF and SDL if the contract includes them.</p><h3>Net Pay</h3><p>What is left after PAYE, the employee's UIF contribution and the employee's own contributions are deducted. This is the amount that reaches the bank account.</p><p>Net pay is always lower than CTC.</p><h2>What Is Remuneration?</h2><p>Remuneration is all payment an employee receives for their services. It includes salary, bonuses, allowances and certain benefits.</p><p>Payroll uses remuneration as the base for PAYE, UIF and SDL.</p><p>Remuneration is not limited to money. The Basic Conditions of Employment Act (BCEA) defines it as any payment in money or in kind, or both, made or owing to a person for working for another person.</p><h3>Remuneration Is Not the Same as Wage</h3><p>The BCEA treats "wage" differently. A wage is the amount of money paid or payable for ordinary hours of work.</p><p>This matters for the national minimum wage. The National Minimum Wage Act excludes payments in kind and allowances that enable the worker to work, such as transport, tool, food or accommodation allowances, when the wage is calculated. So a benefit can form part of an employee's remuneration without counting towards the minimum wage.</p><h2>What Is a Fringe Benefit?</h2><p>A fringe benefit is a non-cash benefit the employee receives because of their employment. Common examples are:</p><ul><li><p>a company car;</p></li><li><p>a low-interest or interest-free loan;</p></li><li><p>free or subsidised accommodation; and</p></li><li><p>employer contributions to a medical scheme or retirement fund.</p></li></ul><p>The employee does not receive the benefit as cash. But the Income Tax Act still treats the value of the benefit as part of the employee's taxable income. SARS sets the value for each type of benefit.</p><p>This is why a CTC package includes the taxable value of benefits and not just the cash salary.</p><h2>What Is a Contribution?</h2><p>A contribution is a payment into a retirement fund or a medical scheme. It can be made by the employee, the employer or both.</p><p>The employee's contribution is normally deducted from their salary. The employer's contribution is paid by the employer on top of what is deducted from the employee.</p><p>How the contribution is treated for tax depends on the type of fund, and the employer's contribution to a medical scheme is a taxable fringe benefit. The employee then receives a medical scheme fees tax credit, which reduces the PAYE they pay.</p><h2>What Happens When the Split Changes?</h2><p>Changing the split changes the tax and the net pay. It does not change the employer's total cost.</p><p>For example, an employee who cancels their medical aid stops having their own contribution deducted, so their net pay goes up. They also lose the medical tax credit, and the employer's contribution stops being a taxable fringe benefit.</p><p>What happens to the employer's part of the contribution depends on the contract. Record the answer in writing before the change is made.</p><h2>What This Means for Employers</h2><h3>Define CTC in the Contract</h3><p>State what the CTC figure includes and what it does not. Do not assume that the employee understands the term the same way you do.</p><h3>List the Components</h3><p>Set out the basic salary, the benefits and the employer contributions in the remuneration letter, with the amount of each.</p><h3>Explain the Difference Between CTC and Net Pay</h3><p>Many disputes start because the employee expected to receive the CTC figure in the bank. Explain at the offer stage that net pay will be lower.</p><h3>Deal With Changes in Writing</h3><p>If the employee asks to change the split, record the new structure in a signed letter before payroll makes the change.</p><h3>Review Packages Regularly</h3><p>Tax rules, credits and contribution limits change. Review your packages every year.</p><h2>Conclusion</h2><p>Cost to company is the total cost of an employee to the employer. It combines cash pay, employer contributions and the value of benefits into one figure.</p><p>It is not the same as gross remuneration, which is the employee's earnings before deductions. It is also not the same as net pay, which is what the employee receives after deductions.</p><p>A fringe benefit is a non-cash benefit that is taxed on a value set by SARS. Contributions to a medical scheme and a retirement fund can be made by the employee, the employer or both.</p><p>Employers who define these terms in the contract avoid most of the disputes that arise later.</p>