How to Calculate PAYE Tax in Nigeria?

Understanding and calculating your Pay As You Earn (PAYE) tax in Nigeria is crucial for both employers and employees. This tax system helps the government collect income tax from individuals through deductions made at the source of their salaries.

How to Calculate PAYE Tax in Nigeria?

This guide will provide a comprehensive overview of PAYE tax calculation in Nigeria, including:

  • Key concepts and definitions
  • Steps involved in calculating PAYE tax
  • Taxable income and deductions
  • Tax brackets and rates
  • Using online calculators and resources

What is PAYE Tax?

PAYE is a withholding tax system where employers deduct a portion of an employee’s income tax from their salary before paying it out. This deducted amount is then remitted to the Federal Inland Revenue Service (FIRS) on behalf of the employee.

Who is Liable to Pay PAYE Tax?

All employed individuals in Nigeria earning above the national minimum wage are liable to pay PAYE tax. However, there are some exemptions, such as:

  • Individuals earning minimum wage or below
  • Persons under 18 years of age
  • Individuals receiving exempt income, such as interest on government bonds

Calculating PAYE Tax: A Step-by-Step Guide

Here’s a breakdown of the steps involved in calculating PAYE tax:

1. Determine Gross Income:

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

2. Apply Deductions:

  • Certain deductions are allowed from your gross income before calculating tax. These include:
    • Consolidated relief allowance (CRA): This is a fixed amount depending on your marital status and number of dependent children.
    • Pension contributions: The amount you contribute to your pension scheme.
    • National Housing Fund (NHF) contributions: The mandatory contribution towards your housing needs.
    • National Health Insurance Scheme (NHIS) contributions: The mandatory contribution towards your healthcare.
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3. Calculate Taxable Income:

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

4. Identify Tax Bracket:

  • Nigeria’s tax system uses a progressive tax structure, meaning the tax rate increases as your income rises. There are five tax brackets with corresponding rates:
Taxable Income Range (NGN)Tax Rate (%)
Below 300,0000
300,000 – 400,0007
400,000 – 500,00011
500,000 – 700,00015
Above 700,00024

5. Calculate PAYE Tax:

  • Apply the corresponding tax rate from your identified bracket to your taxable income.

Example:

Employee A earns a monthly salary of NGN 100,000, receives a housing allowance of NGN 20,000, and contributes NGN 8,000 to their pension scheme. They are married with two dependent children.

Step 1: Gross Income

  • NGN 100,000 (salary) + NGN 20,000 (allowance) = NGN 120,000

Step 2: Deductions

  • CRA (married with 2 dependents): NGN 250,000
  • Pension contribution: NGN 8,000

Step 3: Taxable Income

  • NGN 120,000 – NGN 250,000 – NGN 8,000 = NGN -138,000

Since the taxable income is negative, Employee A is not liable to pay PAYE tax in this instance.

Additional Considerations:

  • Minimum Tax: Individuals earning above the minimum wage are subject to a minimum tax of 1% of their gross income, even if their calculated PAYE tax is zero.
  • Tax Reliefs: Certain expenses and investments may qualify for tax reliefs, further reducing your taxable income.

Online Calculators and Resources:

Several online calculators and resources can help you calculate your PAYE tax, such as:

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