Introduction

Nigeria is one of the few countries in West Africa to impose a personal income tax. Nigeria also uses the Pay-As-You-Earn (PAYE) method to determine an employee’s personal income tax from paid employment. This is referred to as the PAYE tax. The PAYE system is an indirect taxation system that employs the use of employers to administer taxes on behalf of their employees’ personal incomes.

Nigeria’s personal income tax uses a progressive tax system where the more money you earn, the higher your rate of taxation will be. The Nigerian government uses personal income tax to raise revenue for various social and economic development programmes.

At the conclusion of this article, readers should have the answers to the following frequently asked questions, which were sourced from Google:

• How much is PAYE tax in Nigeria?

• Is PAYE the same as personal income tax?

• What is the minimum PAYE tax in Nigeria?

• How is personal income tax calculated in Nigeria?

Personal Income Tax and PAYE

While they are frequently used interchangeably, they do not have the same meaning.

Personal Income Tax refers to the total levy levied on individuals who are tax assessable, whereas PAYE is a method of collection targeted primarily at those in paid employment.

PAYE is an indirect method of collecting personal income tax, requiring employers to deduct and remit personal income tax when making salary payments to employees. This shifts the primary responsibility away from the individual taxpayer and places it squarely on the employer’s shoulders.

The underlying principle is that personal income tax is filed annually, and you would have to wait until the end of the year or tax filing season to learn how much you earned.

One thing to keep in mind is that because the principle is for taxpayers to pay tax on income earned, determining the rates at the point of earning would be difficult. As a result, PAYE does not work well for sporadic income sources or for those who are not in structured, regular paid employment.

For those in paid employment, the Act requires that employers estimate the potential annual earnings of their employees and remit taxes on a monthly (or other frequency) basis. Summarily, PAYE only really works with a registered employer involved.

Steps for the implementation of PAYE/PIT

1. Determine significant economic presence for individuals

To be assessable for personal income tax in Nigeria, individuals must be deemed to have a significant economic presence in the country. This presence is determined by the individual’s income, assets, and liabilities, among other factors.

Individuals who earn income in Nigeria through paid employment, self-employment, or other sources are considered to have a significant economic presence.

Individuals who have a significant economic presence in Nigeria will be subject to personal income tax.

2. Identification of taxpayers for chargeable individuals

Individuals must register with their state’s internal revenue service (or with the federal government if they reside in the Federal Capital Territory or are military personnel) following the determination of economic presence. The state of residence does not have to be the same as the state of employment. Typically, it is the state where the individual spends more than 50% or 6 months of their time. In practice, the individual determines the state of residence.

Once the registration process is complete, the individual is assigned a Taxpayer ID number, which serves as the point of reference for all tax matters pertaining to that individual.

Bear in mind that if your state of residence changes, your taxpayer ID will change as well, as the databases of the various state internal revenue services are not identical.

3. Chargeable Income

Not all income is subject to taxation. Thus, a method for determining the nature and amount of taxable income exists.

Income tax will be paid on the worldwide income of a Nigerian resident. Worldwide income refers to income earned both within and outside of Nigeria. Non-taxable income, income on which no further tax is due, tax-exempt items, allowable business expenses, and capital allowance are all examples of income subject to the PIT.

In practice, gross income is defined as total employment income minus tax-exempt items. However, this is not chargeable income due to relief and allowances.

The reliefs and allowances in Nigeria currently include the following:

• The higher of NGN200,000 per year or 1% of the yearly gross income, plus 20% of the yearly gross income is known as the consolidated relief allowance, or CRA.

• A person’s or a spouse’s life insurance policy premium in the previous year.

• National Health Insurance Scheme, National Housing Fund, and approved pension fund contributions.

The chargeable income is what remains after deductions for relief and allowances.

4. Tax Rates

Nigeria uses a graduated tax scale to assess individual income tax.

• The first 300,000 is charged at 7%

• The next 300,000 is charged at 11%

• The next 500,000 is charged at 15%

• The next 500,000 is charged at 19%

• The next 1,600,000 is charged at 21%

• Any amount above 3,200,000 is charged at 24%

If you dislike arithmetic, applying the rates may be a little confusing due to the multiple steps for higher earners, but it is as simple as determining the chargeable income and applying the relevant rate(s). Accounting software can help with this.

5. Minimum tax for personal income tax in Nigeria

A minimum tax rate of 1% of total income is due if a taxpayer has no taxable income because of personal relief and allowances. Individuals earning less than ₦300,000 per year are completely exempt.

6. Tax returns and due dates

As previously stated, personal income tax administration can be classified as PAYE or non-PAYE. Because PAYE is the most prevalent, we will begin there.

An employer must file two annual PAYE tax returns for each employee.

• The Form H1 return is sometimes known as an annual employer’s tax return. It displays the employees’ previous tax year’s name, payer id, gross yearly income, and PAYE taxes.

• The annual PAYE tax paid, as well as the receipts, are shown on Form G.

These forms must be filed by January 31 of the following year.

Also, employers must deduct and remit PAYE tax to the appropriate tax authority each month through authorized banks. This must occur within the first ten (10) days of the subsequent month.

For PAYE and non-PAYE earners, they must file a form A. Form A is a yearly declaration of individual income and an application for allowances and relief. It must be filed by the following March 31st.

A general misconception about PAYE

We have discussed the fact that PAYE is not the only type of personal income tax in Nigeria. PAYE would be practicable if there was an employer-employee relationship.

Even though PAYE is deducted and remitted monthly, personal income tax is an annual tax, not a monthly tax. This implies that the tax will be calculated on an annual chargeable income and not the monthly payments. This also assists in capturing the taxable employee emoluments that are not included in the monthly payroll, such as leave allowance, 13th-month pay, and bonuses. Calculating the tax rates on these one-off payments is impossible.

There is a widespread practice used in calculating the monthly take-home pay of staff. However, that application may cause more taxes to be deducted from the gross pay.

Even where the net pay is fixed, the gross pay will be inflated to adjust for higher taxes needed to reach the amount, which is a higher cost to the company.

The most important thing to realize is that PAYE is an annual tax and not a monthly one. Sure, the taxes are remitted monthly, but the returns are filed annually. In the event of a tax audit, the tax authorities begin by calculating an individual’s annual pay and applying tax principles.

However, a few practitioners treat the computation as though it were a monthly one, which means dividing all the parameters by 12. According to our tests, this would be irrelevant if there were no or only minor changes in pay throughout the year. But if there are any significant changes, the practice of computing the PAYE monthly to arrive at the net pay may cause more taxes to be calculated.

Let’s jump right into an example.

Joshua’s gross pay between January and June was ₦350,000 per month, and it was increased to ₦550,000 from July to the end of the year. If we apply the tax calculation monthly, the tax will be ₦287,793.33 and ₦442,853.33 respectively.

Total Gross Pay Net Pay

January to June ₦2,100,000.00 ₦1,726,759.98

July to December ₦3,300,000.00 ₦2,657,119.98

₦5,400,000.00 ₦4,383,879.96

But if we applied the taxes on the total gross pay annually as we do during the filing, this is what we get:

Total Gross Pay Net Pay

January to December ₦5,400,000.00 ₦4,394,560.00

The total gross pay for the year is the same at ₦5,400,000 but the net pay is ₦10,680.04 higher when the computation is based on the net pay. Imagine the multiplier effect with more employees.

The reason for the difference is that the Tax bands can get distorted when it is disaggregated.

What to do:

At the beginning of the year, get the annual gross pay is used to compute estimated, taxes deductions and net pay. Note that this is required as part of the annual filings.

If there are any changes, update the gross pay to reflect the new yearly totals. Then compute the new taxes payable, deduct the taxes already paid and spread the balance over the course of the year.

Calculate your personal income taxes for free by clicking on this link from the FIRS.

Conclusion

In this blog post, we aim to provide you with a basic understanding of personal income tax in Nigeria. We hope you are now better equipped to understand Personal Income Tax requirements, how to lodge your tax return and the benefits of doing so. If you have any questions or need assistance with your personal income tax returns, don’t hesitate to contact us today!