How To Calculate PAYE

Tax is imposed on individuals who are either in employment or are running their own small businesses, under a business name or partnership.

The following taxes are administered by the State internal Revenue Under PIT Act

Pay as you earn (PAYE) - Taxes for people in an employment

Taxes from self employed persons (Direct Assessment)

Withholding tax of individual or contractors

Stamp duties

Pay-As-You-Earn (PAYE) i.e. taxes from employment

PAYE is an acronym for “Pay as You Earn”. It is a method of collecting personal income tax from employees’ salaries and wages through deduction at source by an employer as provided by the relevant sections of the Personal Income Tax Act

Taxes under the PAYE scheme fall under the jurisdiction of the State Inland Revenue Service, meaning that all the taxes you pay are remitted to the state of your residence. Finance Act 2020 became effective from January 1st, 2021. It exempts national minimum wage earners from paying the mandatory minimum tax on employment income. 30,000 NGN is the monthly minimum wage in Nigeria at the moment. This means those who earn 30,000 Naira monthly (or less) are not eligible to pay income tax.

Additionally, statutory contributions are excluded from the computation of consolidated relief allowance.

Redefinition of gross income

Section 33(2) of the PITA has been amended to mean that Gross Income is an income from all sources less all non-taxable income, income on which no further tax is payable, tax-exempt items listed in paragraph (2) of the sixth schedule and all allowable business.

In simpler words, the new definition means that tax exempt items should now be deducted from gross emolument before computing the CRA. As a result, employees will no longer benefit from the additional 20% relief previously claimable on the portion of their income that relates to National Housing Fund, pension contribution and other tax-exempt items.

The new personal income act has been amended to give Consolidated Relief Allowance of N200,000 or 1% of Gross Income plus 20% of Gross Income, whichever is higher and exemptions to be charge on Gross salary only (not Basic, Housing and Tfare like before)

Exemption deducted under the PAYE are as follows

Pension= 8% of Gross Salary

National Housing Fund = 2.5% of Gross Salary

Health Insurance = 5% of Gross Salary

Life assurance is subject to the amount paid

Scenario A: Where Pensions, N.H.F and N.H.I.S are opted for

Example

Mr Ahmed earns an Annual Salary Package of N3 million including leave allowance. Mr Ahmed also contributes 2.5% of his basic to the National Housing Fund to enable him to secure a mortgage loan. His employer opts in for pension as part of their employee benefit scheme and he contributes to use the health insurance scheme of the government. Here is how to calculate his payroll tax

1. Apply the consolidated relief and exemptions applicable on Gross Income

Table

Table

Name

Column 2

Column 4

Column 3

Gross Income

3,000,000

Pension

N.H.I.S

There are no rows in this table

⁠

% Monthly (N) Annual (N) Income A 3,000,000 Relief Consolidated Relief 800,000 Pension B 8 240,000 N.H.F C 2.5 75,0000 N.H.I.S D 5 150,000 Less Total Relief E 1,265,000 Total Taxable Income A - E 1,735,000 Workings; CRA= 1% of N3,000,000 + 20% of N3,000,000 = N800,000 Pen= 8% of 3,000,000 = 240,000 N.H.F = 2.5% of 3,000,000 = 75,000 N.H.I.S = 5% of 3,000,000= 150,000 Total Relief = B+C+D Total Taxable income = A - E 2. Using the new Tax table, apply tax percentage of relevant income Tax Table Ist N300,000 =7% Next N300,000 = 11% Next N500,000 =15% Next N500,000 = 19% Next N1,600,000 =21% Over N 3,200,000 =24% A % (B) A x B = C Amount (C) Annual (N) Total Taxable Income 1,735,000 Ist 300,000 7 300,000 X 7% 21,000 Next 300.000 11 300,000 X 11% 33,000 Next 500,000 15 500,000 X 15% 75,000 Next 500,000 19 500,000 X 19% 95,000 Next 1,200,000 (see working) 21 21% of 135,000 28,350 Total Tax Deduction (Addition of C) 252,350 Workings N Total taxable income 1,735,000 Less Already taxed amount out of taxable income (300,000+300,000+500,000+500,000) 1,600,000 Amount left untaxed 135,000 21% of 135,000 = 28,350 From the above workings, Mr Ahmed’s Annual Tax is N252,350 p.a hence his monthly tax deductions is N 21,029.16 (NGN 283,850 divided by 12 months) Scenario B: For Companies who are not deducting pensions and other Exemptions Using Mr Amhed’s example but in this case, his employer has no employee benefit scheme and he isn't interested in a mortgage loan in future, here is how we would calculate his tax 1. . Apply the consolidated relief and exemptions applicable % Monthly (N) Annual (N) Income 3,000,000 Less C.R Consolidated Relief 800,000 Total Taxable Income 2,200,000 Workings; Consolidated Relief = (20% of Gross income)+200,000 20% of N3,000,000 Plus 200,000 (20 X 3,000,000) / 100 = 600,000 Adding 200,000 gave us 800,000 as the total consolidated relief 2. Using the new Tax table, apply tax percentage of relevant income Tax Table Ist N300,000 =7% Next N300,000 = 11% Next N500,000 =15% Next N500,000 = 19% Next N1,600,000 =21% Over N 3,200,000 =24% A % A x B =C Amount ( C) Annual (N) Total Taxable Income 2,200,000 Ist 300,000 7 300,000 X 7% 21,000 Next 300.000 11 300,000 X 11% 33,000 Next 500,000 15 500,000 X 15% 75,000 Next 500,000 19 500,000 X 19% 95,000 Next 1,600,000 (see working) 21 21% of 600,000 126,000 Total Tax Deduction (Addition of c) 350,000 Working N Total taxable income 2,200,000 Less Already taxed amount out of taxable income (300,000+300,000+500,000+500,000) 1,600,000 Amount left untaxed 600,000 21% x 600,000 = 126,000 From the above workings, Mr Ahmed’s Annual Tax is N350,000 hence his monthly tax deductions is N29,166.67. (NGN 283,850 divided by 12 months) Scenario C: In a case where PENSION only is opted for It's the same process as Example A, only this time, pension alone is calculated as the exemption Using Mr Amhed’s Example. Lets assume his company only contributes pension, here is how we would calculate his payroll taxes 1. Apply the consolidated relief and exemptions applicable on Gross Income % Monthly (N) Annual (N) Income A 3,000,000 Consolidated Relief B 800,000 Pension C 8 240,000 Less Total Exemption D (1. 040,000) Total Taxable Income E 1,960,000 Workings; CRA (B)= 1% of N3,000,000 + 20% of N3,000,000 = N800,000 Pen (C)= 8% of 3,000,000 = 240,000 Total Exemption (D) = B+C Total Taxable income (E)= A- D 2. Using the new Tax table, apply tax percentage of relevant income Tax Table Ist N300,000 =7% Next N300,000 = 11% Next N500,000 =15% Next N500,000 = 19% Next N1,600,000 =21% Over N 3,200,000 =24% % A x B Amount Annual (N) Total Taxable Income 1,960,000 Ist 300,000 7 300,000 X 7% 21,000 Next 300.000 11 300,000 X 11% 33,000 Next 500,000 15 500,000 X 15% 75,000 Next 500,000 19 500,000 X 19% 95,000 Next 1,600,000 (see working) 21 21% of 360,000 75,600 Total Tax Deduction 299,600 Working N Total taxable income 1,960,000 Less Already taxed amount out of taxable income (300,000+300,000+500,000+500,000) 1,600,000 Amount left untaxed 360,000 From the above workings, Mr Ahmed’s Annual Tax is N299,600 hence his monthly tax deductions is N24,966.67. (NGN 299,600 divided by 12 months) Scenario D Lets increase Mr Ahmed’s salary Assume Mr Ahmed became Chief of staff to earn 11,400,000 per annum, without pension and other exemption, here is how we can calculate his payroll taxes 1. Apply the consolidated relief and exemptions applicable on Gross Income % Monthly (N) Annual (N) Income 11,400,000 Consolidated Relief 2,480,000 Less Total Exemption (2,480,000) Total Taxable Income 8,920,000 2. Using the new Tax table, apply tax percentage of relevant income Tax Table Ist N300,000 =7% Next N300,000 = 11% Next N500,000 =15% Next N500,000 = 19% Next N1,600,000 =21% Over N 3,200,000 =24% % A x B Amount Annual (N) Total Taxable Income 8,920,000 Ist 300,000 7 300,000 X 7% 21,000 Next 300.000 11 300,000 X 11% 33,000 Next 500,000 15 500,000 X 15% 75,000 Next 500,000 19 500,000 X 19% 95,000 Next 1,600,000 21 21% x 1,600,000 336,000 Over N3,200,000 see workings 24 24% X 5,720,000 1,372,800 Total Tax Deduction 1,932,800 Working N Total taxable income 8,920,000 Less Already taxed amount out of taxable income (300,000+300,000+500,000+500,000+1,600,000) 3,200,000 Amount left untaxed 5,720,000 From the above workings, Mr Ahmed’s Annual Tax is N1,932,800 hence his monthly tax deductions is N161,066.67. (NGN 1,932,800 divided by 12 months) My favourite payroll app or online calculator is below Download Nigerian Income Tax Calculator by Deloitte on google play store or Visit https://apps.firs.gov.ng/taxcalculator

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