What is Code 3706 on a South African Payslip?
Entertainment allowance explained — why it is taxable income, when actual expenses can be claimed back, the difference from expense reimbursements, and what appears on your IRP5.
3706Code 3706 is an entertainment allowance — a fixed amount your employer pays to cover client entertainment costs. Unlike travel or subsistence allowances, there is no prescribed tax-free rate for entertainment. The full allowance is taxable income and PAYE is deducted each month at your marginal rate.
What Code 3706 Means
Code 3706 is an entertainment allowance — an amount your employer pays you, typically on a fixed monthly basis, to cover the cost of entertaining clients, customers, business contacts, or prospects. This might include client dinners, sporting events, golf days, or similar corporate entertainment activities that are genuinely business-related.
The critical difference between code 3706 and other allowances: there is no SARS prescribed rate that makes entertainment tax-free. Travel allowances have prescribed per-km rates. Subsistence allowances have daily limits. Entertainment allowances have no equivalent — they are always taxable income in the hands of the employee, and your employer deducts PAYE on the full amount each month.
This often surprises employees who feel that the allowance is not really their money — they will spend it on business entertainment anyway. Legally, however, it is income, and it is taxed as income. The ability to claim some of it back via a deduction on your annual return is limited and conditional.
Entertainment Allowance vs Expense Reimbursement
The distinction matters significantly for tax purposes:
- Entertainment allowance (code 3706) — a fixed monthly amount paid upfront, regardless of what you actually spend. Taxable in full. PAYE deducted monthly.
- Actual expense reimbursement — your employer reimburses you for specific entertainment costs on presentation of receipts. Generally not taxable because you are being made whole, not receiving additional income.
If you consistently spend less on entertainment than your fixed code 3706 allowance, you are effectively being taxed on money you did not use for its intended purpose. A switch to reimbursement on receipt would be more tax-efficient. Raise this with your employer or HR department if the gap is significant.
How It Affects Your Take-Home Pay
| Item | Amount |
|---|---|
| Monthly salary (code 3601) | R35,000 |
| Monthly entertainment allowance (code 3706) | R3,000 |
| Total monthly remuneration for PAYE | R38,000 |
| Annual projected income | R456,000 |
| Approximate marginal tax rate | 31% |
| PAYE on entertainment allowance | ≈R930/month |
| Net take-home from R3,000 allowance | ≈R2,070/month |
Commission earners (code 3606) who earn more than 50% of their total remuneration from commission have broader rights to deduct business expenses — including entertainment directly related to earning commission — on their annual return. For salaried employees (code 3601 only), Section 23(m) of the Income Tax Act is very restrictive. Most entertainment expenses are not deductible for salaried employees regardless of how genuine the business purpose. Keep receipts, but consult a registered tax practitioner before claiming.
Frequently Asked Questions
What does code 3706 mean on my payslip?
Code 3706 is an entertainment allowance — a fixed amount paid to cover client entertainment costs such as dinners, golf days, or corporate events. It is fully taxable income. Your employer deducts PAYE on the full amount each month at your marginal rate. The gross allowance appears on your IRP5 as part of your total remuneration for the year.
Why is my entertainment allowance taxed if I spend it on business?
SARS treats a fixed allowance as income, regardless of how you intend to spend it. The logic is that you received money — what you do with it after is your choice. Unlike travel and subsistence, there is no prescribed tax-free rate for entertainment. The alternative — actual expense reimbursement on receipt — avoids this problem because it is a cost recovery, not income. If your employer pays a fixed monthly code 3706 allowance, PAYE applies to the full amount.
Can I claim entertainment expenses on my annual tax return?
For salaried employees, Section 23(m) of the Income Tax Act heavily restricts expense deductions — entertainment expenses are generally not deductible. Commission earners (more than 50% of income from code 3606 commission) have broader rights and may be able to deduct genuine business entertainment expenses. Keep receipts and records in all cases, and discuss with a registered tax practitioner before making any claims.
What is the difference between code 3706 and actual expense reimbursement?
Code 3706 is a fixed allowance — taxable income paid monthly regardless of what you spend. Actual expense reimbursement is when your employer pays you back for specific entertainment costs you incurred, on presentation of receipts. Reimbursements are generally not taxable. If your actual entertainment spend varies, reimbursement on receipt is more tax-efficient than a fixed monthly code 3706 allowance.
Does code 3706 appear on my IRP5?
Yes. The total entertainment allowance paid during the tax year appears as code 3706 on your IRP5. It forms part of your gross remuneration and is included in your taxable income. PAYE was deducted monthly on the allowance, so the amount is reflected in your total tax paid for the year alongside your salary and other income components.
Is it better to have a code 3706 allowance or to be reimbursed for actual entertainment costs?
Reimbursement on actual receipts is generally more tax-efficient — the reimbursement is not taxable income. A fixed code 3706 allowance is always taxable, and if you spend less than the allowance in any month, you are paying tax on money you did not use for its intended purpose. Discuss with your employer whether a switch to reimbursement on receipt is possible if this situation applies to you.