How to Calculate PAYE Tax in Nigeria – Guide to taxation of employees

Introduction

Personal Income Tax payments on a PAYE basis can get complicated and confusing. What’s more, without the right information, you may end up paying more tax than you need to.

There are ways to save your hard-earned money and ensure you are regulatory compliant – whether you’re an individual filer or a corporate.

In this article, we share key information about how to calculate PAYE tax in Nigeria and how to pay PAYE tax in Nigeria. We also help you reduce your tax liability with helpful tips. Keep reading!

 

What is Personal Income Tax in Nigeria?

Nigerians working in Nigeria are mandated to pay Personal Income Tax (P.I.T.) every year. This PIT applies to anyone employed. This could include anyone who is:

• Employed with a public or private employer
• A partner in a partnership firm
• Works in or leads a joint venture
• Works at or heads an unincorporated trust
• Runs a family or a community

The method used by the Nigerian government to calculate and deduct the tax is called PAYE.

 

What is the PAYE Tax Rate in Nigeria?

PAYE refers to “Pay As You Earn”. It is a method used to deduct personal income tax at the source (1) when an employee earns their salary. The personal income tax you pay is then called PAYE tax.

The PAYE tax, once deducted by the employer, is typically remitted to the State Internal Revenue Service. The only exception is when the employee in question is a resident of the Federal Capital Territory, in which case, their PAYE tax is remitted to the Federal Capital Territory – Internal Revenue Service (FCT-IRS).

Employers in Nigeria will tax their employees based on their residency status. Nigerians who meet the following pre-conditions will be subjected to the PAYE tax:

• They are employers who work in Nigeria.
• They are employers who have a fixed/permanent base in Nigeria.
• They are employees who work either full or part-time in Nigeria.

 

Things to Know about PAYE Tax

Apart from the details mentioned above, there are a few more things to know about the PAYE tax:

• First, the PAYE tax is a taxation method used to process personal income tax.
• Second, it is taxed on chargeable income, calculated after excluding deductions, according to the relevant income-specific tax bracket.
• Third, it is tax paid by anyone in Nigeria who is in paid employment during the year of taxation.

 

The only exceptions to these rules are:

• Anyone who is considered an applicable taxpayer as per Section 2 (1) (a) of the Personal Income Tax (PIT) Act – but who earns less than the National Minimum Wage of 30,000 NGN per year.
• Anyone covered under section 2(1) (b) of the PIT Act, which includes:
• Employees of the Nigerian Police Force, Nigeria Navy, Nigerian Army, and Nigeria Air Force who are not in civilian roles
• Nigerian Foreign Service Officers
• Residents living in the Federal Capital Territory
• People who reside outside Nigeria and who gain income or profit from Nigeria

 

Expatriates in Nigeria

The next thing to know about PAYE is if expatriates working in Nigeria are subjected to PAYE tax.

Well, expatriates may come within the purview of personal income tax and PAYE if their work is deemed to be performed either partially or completely in Nigeria. 

They may be exempted from PAYE tax if they:

• Are not a resident of Nigeria
• Have stayed in Nigeria for less than an aggregate of 183 days within 12 months (This includes any temporary leave of absence or annual leaves they take)
• Are required to pay tax in another country which has a double tax treaty with Nigeria
• Have an employer who is not Nigerian
• The employer does not bear their salary in a fixed location within Nigeria.

 

Significant Economic Presence for Individuals

Now, let us consider the taxation rules for foreigners based outside Nigeria but who conduct business in Nigeria.

In 2020, the Finance Act (FA) brought in a few changes, which affected the taxation status of these companies. As per the Companies Income Tax (Significant Economic Presence) Order 2020, the Minister of Finance made a Significant Economic Presence (SEP) Order.

The SEP Order outlines the conditions under which Non-Resident Companies (NRCs) and foreign employees offering services in Nigeria can have a taxable presence.

According to this SEP Order, any individual, trustee, or executor outside Nigeria providing management, professional, technical, consultancy, or digital services to a resident of Nigeria will be subjected to a withholding tax (WHT).

This WHT is typically 5% of the income earned due to these activities. Depending on the nature of this international business, the NRC can avail of tax relief under a double tax treaty with Nigeria.

 

Key Terminologies

To calculate PAYE tax in Nigeria, we must first understand what specific terminologies mean and what they entail. So, let’s take a look at key terms you need to know in PAYE tax:

 

Chargeable Income

Chargeable income is an individual’s income charged with Nigeria’s income tax. To calculate chargeable income, you will need to include any of the following earnings, as applicable to you:

• Salary
• Wages
• Professional fees
• Employment allowances
• Any other profits or gains made from employment, which include:
• Workplace compensation
• Bonuses
• Premiums earned
• Other eligible benefits
• Any prerequisites given, granted or allowed by any person (applicable to both temporary and permanent employees)
• Any amount or expenses incurred by the employee during the performance of their duty.

Any deductions must be excluded for this income to be considered chargeable, as the Government of Nigeria allows.

 

Allowable Deductions

Allowable deductions are any expenses incurred necessarily, wholly, reasonably, and exclusively to produce a taxable income. 

They are exempted from PAYE taxation in Nigeria.

Generally, the following expenses are deemed allowable deductions in Nigeria:

• Contributions to the National Health Insurance Scheme
• Contributions to the National Pension Scheme
• Life assurance premiums for the taxpayer and their spouse (excludes deferred annuities)
• Gratuities
• National Housing Fund
• Owner-occupied accommodation-related loans and mortgages
• Personal deductions like charitable contributions, healthcare expenses and medical insurance premiums
• Personal tax allowances like consolidated relief allowance
• Business deductions:
• Interest on borrowings for business purposes
• Rent and premiums on any land and building used for income-generation activities
• Repairs and maintenance expenses for income-generation purposes
• Business/professional subscription costs
• An additional 20% of gross income is also allowed as a deductible.

 

Rates

In Nigeria, anyone paying personal income tax on a PAYE basis will be subjected to graduated income levels for different income brackets. What this means is that, as your income increases, so does your tax payable.

Depending on your income level and what tax bracket you fall within, you may be subjected to the following tax rates – 7%, 11%, 15%, 19%, 21% and 24%. 

In the article, we have provided a detailed PAYE tax table with rates and deduction amounts for your reference.

 

Minimum Tax

According to the PIT Act, every employed Nigerian is subjected to a minimum tax of 1% of their gross earnings. 

This minimum tax applies to anyone with no taxable income or a PAYE tax that is less than the minimum tax amount.

Again, the only exception to this rule is employed individuals who earn less than 30,000 NGN per year.

 

Returns and Due Dates

The following due dates must file the PAYE tax returns:

• Individuals, including self-employed persons, individuals on direct assessments, and high net-worth individuals, must file the PAYE returns of the preceding year before March 31st.

• Employers filing on their employees’ behalf must file their yearly PAYE tax returns before January 31 each year. Employers typically make remittances on the 10th day of the month, after the month of the deduction of PAYE.

• N.R.C.s operating in Nigeria are expected to make remittances for PAYE before the 21st of every month.

 

Penalties for Non-Payment/Default

Individuals, employers, and NRCs failing to meet the deadlines for PAYE tax filing and remittances will be subjected to the following penalties:

• A fixed penalty of 10% on the amount due. Plus, an interest penalty is typically between 15% and 21%.
• On conviction, the guilty parties are subjected to the following penalties:
• Individuals – 50,000 NGN
• Employers – 500,000 NGN

 

How to Calculate Your PAYE Tax Payable

Now let’s look at the PAYE tax rate Nigerians need to pay. To help with the tax calculation, we have given below the step-by-step process for calculating PAYE tax in Nigeria.

 

Step 1 – Get a Salary Break-Up

The first thing you need to do to calculate your PAYE tax rate is get a detailed salary breakdown. That will help you understand what is your:

• Gross income earned that year = Total income before any tax deduction.
  
• Allowable deductions you receive for the year = Expenses exempted from paying personal income tax in Nigeria.
• With proper financial planning, you can make sure you have the highest deductions possible.
• Chargeable income for the year = Gross income – Allowable deductions.

 

Step 2 – Calculate Your Total Taxable Income

Add all your allowable deductions and calculate the total deductions you are eligible for.

Next, subtract the total deductibles from your gross income.

The amount you have left behind is the chargeable income on which you will pay the PAYE tax rate in Nigeria.

 

Step 3 – Check the Tax Rates that are Applicable to Your Taxable Income

The Nigerian Government uses a graduated tax rate to ensure individuals at different income levels are taxed accordingly.

We have given the graduated PAYE tax table in Nigeria below to help you understand tax rates. All currency values are calculated in Nigerian Naira (NGN).

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Step 4 – Calculate the Actual Tax Payable for the Year

Once you calculate the personal income that is taxable for you, you should use the relevant tax rate to calculate the exact amount of PAYE tax you will need to pay.

Notice the use of the terms “First 300,000” and “Next 300,000”. This is because of the nature of graduated personal income taxes in Nigeria.

This means that you will need to pay the cumulative taxable amount listed in the different income brackets, depending on the increase in your income.

So, if your earnings were under 300,000 NGN last year, you only needed to pay a PAYE tax of 21,000 NGN. But, if your income moves into the 300,000-600,000 NGN bracket, you must pay 21,000 + 33,000 NGN = 54,000 NGN as PAYE tax.

This is how your earnings will be taxed until you reach the “over 3.2 million NGN” bracket. In that case, you must pay 24% of the difference between 3.2 million and your annual gross earnings.

 

 

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An Example as An Illustration

Let’s use a fictitious example to understand how to calculate PAYE tax in Nigeria and what tax rate Nigerians must pay for their income tax under the PAYE method.

Dara is employed as an investment banker in Nigeria. She has earned a gross income of 7 million NGN. She is also entitled to a few allowable deductions this year. 

This includes the consolidated relief allowance (CRA), 20% of earned income, and contribution to the pension fund.

Using this information, we can calculate her income tax and determine how much PAYE tax she needs to pay.

 Note that:

• CRA is calculated as the higher value between 200,000 NGN and 1% of the gross income.
• Pension is calculated at 8% of the gross income.

So, now, let us calculate Dara’s taxable income.

 

Calculation of Dara’s PAYE Tax Payable

Dara’s Gross salary per year: 7,000,000 NGN

Allowable deductions:

• C.R.A. – 200,000 NGN (because this is higher than 1% of 7 million NGN = 70,000 NGN)
• 20% of earned income – 20% of 7 million NGN = 1,400,000 NGN
• Pension contribution made by Dara – 8% of gross income = 560,000 NGN

Total allowable deductions will come up to = 200,000 + 1,400,000 + 560,000 = 2,160,000 NGN

Dara’s Total Taxable Income = Gross salary – Allowable deductions =

7,000,000 – 2,160,000 = 4,840,000 NGN.

We need to calculate how much tax Dara has to pay on her 4.84 million NGN. So, let’s look at the PAYE tax table in Nigeria to figure out what graduated tax level she falls under.

Based on the table provided, Dara’s earnings are subject to taxation and exceed 3.2 million NGN. Consequently, she is liable to pay the following amount of tax on her yearly income: