How to Calculate PAYE Tax in Nigeria

As you must have known already, the gross salary on an employee in a contract differs from the monthly salary which that employee will actually receive at the end of the year. There are other expenses deducted from the gross salary to arrive at the net salary. Some of these expenses include taxes. This article helps you understand more about the PAYE tax and how it is calculated in Nigeria.

Points to note about PAYE tax

  • PAYE tax is calculated per person
  • The currency of the taxable income band is calculated in Nigerian Naira
  • The gross income of an employee includes any salary, income, fee, bonus, gain as well as benefits in kind of an employee

Personal Income tax is a tax that applies to people who earn their living in Nigeria. The tax administrator for the Personal Income tax is the Federal Internal Revenue Service. Personal Income Tax is collected via PAYE (Pay As You Earn) method on the 10th day of each month. This is called the PAYE tax.

A taxpayer must also file tax returns by the 31st of March of each year. Refusal to file tax returns before this date will attract a fine of ₦5,000. The fine increases ₦100 for each day that you are late. One can even get a prison sentence of 6 months if one jokes around with taxes.

How to calculate PAYE tax

Nigeria adopts a Pay-As-You-Earn (PAYE) method in calculating personal income tax of employees. This is called PAYE tax. This tax rate progresses from 7 percent to 24 percent of an employee’s taxable income.

The taxable income band ranges from NGN300, 000 to above NGN3.2 million per annum. In the case where an individual has no taxable income or has a PAYE tax lower than the minimum tax, a minimum tax of 1 percent of gross income is applied.

An employer is also responsible for deducting monthly PAYE tax from his employees’ salary and remitting the tax to the relevant tax authority (in this case, FIRS). The tax is paid through designated banks, within 10 days of the next month.

Legislation

Personal Income Tax (Amendment) Act, 2011 (“PITAM”) is the principal act for the taxation of employees in Nigeria. Nigerian workers’ pay tax based on residency. Thus, an employee would pay taxes if

  • the employee works in Nigeria (full or part-time)
  • the employer is in Nigeria
  • the employer has a fixed base in Nigeria.

Usually, non-residents are not liable to pay taxes in Nigeria. However, an expatriate employee may be liable to tax in Nigeria if;

  • the employee stays more than 183 days in any 12-month period
  • the employer is resident in Nigeria and bears the employee’s cost
  • the employee has not paid tax in another country.

If an expatriate resides in Nigeria, he or she would pay income tax on worldwide income. Worldwide income is a term used to refer to income received within and outside Nigeria.

Income chargeable to personal income tax (PIT) includes any salary, gains, profit, benefits, and allowances that come from employment. There are allowances and reliefs that are not taxable and can be used to reduce the taxable income. These are:

  • Consolidated relief allowance: consolidated relief allowance is any amount higher than NGN200,000 per annum or 1% of annual gross income, in addition to 20% of annual gross income
  • Premium on life insurance policy
  • Contribution(s) to an approved pension fund, National Health Insurance Scheme, National Housing Fund
  • Gratuities

Tax rates, Returns and Due dates

Below are tax rates and the due dates for payment in Nigeria

Personal Income Tax rate in Nigeria Is not fixed but varies according to the annual income of a person. However, the minimum Personal Income Tax rate is 1% (if the annual income of the individual is less than ₦300,000)

If your income is larger than ₦300,000, the rates are calculated differently. Read on below:

The first ₦300,000 of your income are taxed at 7%

The next ₦300,000 are taxed at 11%

The next ₦500,000 are taxed at 15%

The next ₦500,000 are taxed at 19%

The next ₦1,600,000 are taxed at 21%

The tax rate of income above ₦3,200,000 is 24%

You can apply the formula above to your taxable income.

Below is the Personal Income tax for an individual whose gross income is 4 million naira. Here, it is assumed that pension is calculated at 7.5% of gross income.

Gross Income (GI)- 4, 000, 000

Consolidated relief allowance- Amount higher than N200, 000 or 1% of Gross income

20% of Gross income- N800, 000

Children-: N2, 500 per child (maximum of 4) N10, 000

Dependent relatives: N2000 per Dependent relative (maximum of 2) –N4, 000

Pension: 7.5% of Gross income- N300, 000 N1, 314, 000

Taxable income: N2, 686, 000

Annual income                 PIT rate                                              Ta payable

First N300, 000                 7%                                                       N 21, 000

Next N300, 000                11%                                                    N33, 000

Next N500, 000                5%                                                       N75, 000

Next N500, 000                15%                                                    N75, 000

Next N500, 000                19%                                                    N95, 000

Next N1, 600, 000            21%                                                    N228, 060

Gross income: 4, 000, 000

PAYE: N452, 060

Net income after PAYE: 3, 547, 940

When an Employer files tax returns on behalf of an employee

There are two annual PAYE tax returns which an employer is expected to file on behalf of an employee. These are called Form H1 and Form A.

Form H1: Form H1 is an annual employer’s tax return showing the names, annual gross income and PAYE taxes of employees in the past tax year.

Another form called Form G is filed alongside Form H1. Form G shows details of the annual PAYE tax paid and the corresponding receipts. The due date for filing of Form H1 is 31 January of the following year.

Form A: Form A is an annual declaration of individual income and claims for allowances and reliefs form. The due date for submitting Form A is the 31st of March of the current year.

Easier method of calculating PAYE

Another easier method of calculating the Pay As You Earn tax is to go to the FIRS app at apps.firs.gov.ng/taxcalculator.

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