How to Calculate PAYE Tax in Nigeria: A Comprehensive Guide

Understanding and calculating your Pay As You Earn (PAYE) tax in Nigeria is crucial for both employers and employees. Paying the correct amount of tax ensures compliance with regulations and avoids potential penalties. This guide delves into the intricacies of PAYE tax calculation, providing a clear and informative explanation for navigating the process effectively.

What is PAYE Tax?

PAYE is a system where employers withhold income tax from employees’ salaries or wages and remit it to the Federal Inland Revenue Service (FIRS) on their behalf. This simplifies tax collection and ensures a steady flow of tax revenue for the government.

Who is Liable to Pay PAYE Tax?

Most individuals employed in Nigeria are subject to PAYE tax. However, exemptions apply to:

• Employees earning the national minimum wage or less: As of January 1st, 2021, the minimum wage in Nigeria is ₦30,000 per month. Individuals earning this amount or less are exempt from PAYE tax.
• Persons not resident in Nigeria: If you are not considered a resident for tax purposes, you may not be liable for PAYE tax.

Calculating PAYE Tax: A Step-by-Step Guide

Calculating PAYE tax involves several steps:

1. Determine Gross Income:

• This includes your basic salary and all allowances received, such as housing, transport, leave, and others.

2. Apply Deductions:

• Consolidated Relief Allowance (CRA): This is a tax-exempt amount deducted from your gross income. It is the higher of ₦200,000 or 1% of your gross income.
• Pension contributions: These are mandatory deductions from your salary for your retirement benefits.
• National Housing Fund (NHF) contributions: This is a mandatory 2.5% deduction from your basic salary for housing development initiatives.
• National Health Insurance Scheme (NHIS) contributions: This is a mandatory deduction for access to healthcare services, currently at 5% of your basic salary capped at ₦125,000 per annum.

3. Calculate Taxable Income:

• Subtract the total deductions from your gross income to arrive at your taxable income.

4. Apply Tax Rates:

• Nigeria uses a progressive tax system with different tax rates for various income brackets. As of 2023, the rates are:
  • 0% for income below ₦300,000
  • 7% for income between ₦300,000 and ₦1,000,000
  • 13% for income between ₦1,000,000 and ₦3,200,000
  • 24% for income above ₦3,200,000
• Identify the tax bracket your taxable income falls under and apply the corresponding rate.

5. Calculate Monthly PAYE Tax:

• Divide the annual tax amount by 12 to determine the monthly PAYE tax deduction.

Example:

Let’s consider an employee with a monthly gross income of ₦200,000, receiving housing allowance of ₦50,000, and contributing ₦8,000 to pension and ₦2,500 to NHF.

1. Gross Income: ₦200,000 + ₦50,000 = ₦250,000

2. Deductions:

• CRA: Higher of ₦200,000 or 1% of ₦250,000 (₦2,500) = ₦200,000
• Total deductions: ₦200,000 + ₦8,000 + ₦2,500 = ₦210,500

3. Taxable Income: ₦250,000 – ₦210,500 = ₦39,500

4. Tax Rate: Since the taxable income falls below ₦300,000, the tax rate is 0%.

5. Monthly PAYE Tax: ₦0 (as the tax rate is 0%)

FAQ

How is monthly PAYE tax calculated in Nigeria?

MONTHLY TAX PAYABLE

The Tax Payable Per Annum is divided by 12 eg. N78,000 divide by 12 = N6,500 Per Month. Therefore the tax payable every month shall be N6,500 on the PAYE Scheme.

What is the current PAYE tax rate in Nigeria?

How is PAYE Calculated in Nigeria? In Nigeria, PAYE income is calculated based on the amount an individual earns. The tax rate progresses from 7% (if your annual income is less than NGN 300,000) to 24% (if your annual income is more than NGN 3,200,000) of an employment taxable income.

How is minimum tax calculated in Nigeria?

Minimum Tax Rate: As per the current Nigerian tax law, the minimum tax rate is set at 0.5% of a company’s gross turnover. This means that every company is required to pay at least 0.5% of its annual gross turnover as tax.

How is company income tax calculated in Nigeria?

There are currently three (3) CIT rates applicable to companies in Nigeria depending on their turnover, viz, 30% for large companies with over ₦100 million turnover, 20% for medium companies with ₦25 million to ₦100 million turnover, and 0% for small companies with less than ₦25 million turnover.

What is the difference between PAYE and withholding tax?

Employment Income (PAYE)

For most salaried individuals, PAYE (Pay As You Earn) is the Withholding Tax you encounter most frequently. Your employer deducts a portion of your salary every month and remits it to the FIRS.

How do you calculate tax payable?

How Do You Calculate Taxes Manually?

1. Step 1: Calculate Your Total Assessable Income.
2. Step 2: Calculate Your Tax Deductions.
3. Step 3: Calculate Your Taxable Income.
4. Step 4: Calculate Tax on Taxable Income.
5. Step 5: Apply Tax Offsets to Calculate Net Tax Payable.
6. Step 6: Add Medicare Levy to Calculate Total Tax Payable.

How do you calculate taxable income?

Simply stated, it’s three steps. You’ll need to know your filing status, add up all of your sources of income and then subtract any deductions to find your taxable income amount.

What is the minimum salary to pay income tax in Nigeria?

NGN 30,000

Personal income tax rates

Note that employees who earn not more than the national minimum wage (currently NGN 30,000) are no longer liable to tax or deduction of monthly PAYE.

Does business name pay tax in Nigeria?

The Personal Income Tax Act states that a Business Name owner who earns an income from employment or running a business in Nigeria is subject to tax. It is expected that a Business Name owner pays tax for each year that is being assessed on the aggregate amount from every source of income for the year.

Which income is not taxable in Nigeria?

Dividends, interest, rent, or royalties derived and brought to Nigeria in convertible currency through government approved channels and paid into a local account in an approved bank is exempt from Nigerian tax.

How much is the PAYE plan monthly payment?

The Pay As You Earn Plan is a repayment plan with monthly payments that are generally equal to 10% of your discretionary income, divided by 12, but never more than the 10-year Standard Repayment amount.