As a payroll or HR manager in Sri Lanka, one of your core responsibilities is to ensure employees are correctly taxed under the Pay-As-You-Earn (PAYE) system. With the Inland Revenue Department (IRD) continuing to tighten compliance in 2025, it’s more important than ever to stay accurate and up to date.

This guide covers:

• ✅ What is PAYE?
• ✅ Who is liable?
• ✅ How to calculate PAYE
• ✅ Common deductions & exemptions
• ✅ How to file and remit to the IRD

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✅ What is PAYE in Sri Lanka?

PAYE (Pay-As-You-Earn) is a system where employers deduct income tax from employees’ salaries and remit it directly to the IRD each month.

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✅ Who is Liable to PAYE?

As of 2025, any employee earning more than LKR 100,000 per month (LKR 1.2 million annually) is subject to PAYE. This includes:

• Salaries
• Bonuses
• Allowances (except tax-exempt items)
• Benefits in kind

📌 Even expatriates working in Sri Lanka are subject to PAYE if paid locally.

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✅ How to Calculate PAYE (2025 Rates)

You must apply the progressive tax rates to taxable income, after deducting:

• Personal relief (LKR 1.2 million per year)
• Approved deductions (EPF contributions, donations, etc.)

📊 Example: Monthly PAYE Calculation (2025)

Monthly Gross Salary	LKR 200,000
Less: EPF (8%)	LKR 16,000
Less: Personal Allowance (100,000/mo)	LKR 100,000
Taxable Income	LKR 84,000

Apply 6% on the first 83,333 and 12% thereafter…

✅ Or use our Free PAYE Calculator!

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✅ Common Allowances & Benefits – Tax Treatment

Allowance/Benefit	Taxable?
Transport Allowance	✅ Yes (except for official duty)
Medical Reimbursement	❌ No (if supported by bills)
Mobile Bill Reimbursement	✅ Yes (unless job-related)
Meals/Food Allowance	✅ Yes
EPF/ETF Contributions	❌ Employer portion is tax-free

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✅ PAYE Filing & IRD Compliance

As the employer, you must:

• 📅 Deduct PAYE every month
• 💼 File monthly tax schedules (Schedule T10)
• 💵 Remit to IRD by the 15th of the following month
• 📧 File the annual T10A report for each employee

Use RAMIS (the IRD online portal) to file and pay taxes online.

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✅ Penalties for Non-Compliance

Late or incorrect filings can lead to:

• 💸 Penalties up to LKR 50,000
• 📑 Interest on unpaid tax
• 🛑 Legal action by IRD for serious non-compliance

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🧠 Tips for Payroll Managers

• Use a reliable PAYE calculator (like ours!)
• Double-check non-cash benefits
• Maintain a record of all deductions
• Communicate with employees about tax slips (T10A)

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📌 Final Thoughts

Correctly handling PAYE isn’t just about avoiding penalties — it’s about maintaining employee trust and regulatory compliance.

👉 Try our FREE PAYE Calculator for 2025 to simplify your monthly deductions.

Need a custom payroll tool for your company?
📩 Contact us at info@taxcalculator.lk| 📞 [0719204903]