Salary Earner? How To Calculate Your Taxes Using The New PAYE


Salary earners in Nigeria are mandated by law to pay tax under the Pay As You Earn (PAYE) scheme. Every month a portion of your salary is deducted as tax leaving you with a net salary to take home.

Taxes under the PAYE scheme fall under the jurisdiction of the State Inland Revenue Service, meaning that all the taxed you pay are remitted to the state of your residence.

For example, if you live in Ogun State but work in Lagos, you are liable to pay tax to Ogun State and not Lagos State.

Nigerian Personal Income Tax Laws have evolved over the years with several amendments introduced to align with the income of Nigerians. The latest amendment was in 2012 when the Goodluck Jonathan Administration singed into law an Amended Personal Income Tax Act, replacing several controversial sections of the act with a simpler and easy to calculate taxable income.

The new amendments affect several sections of the Personal Income Tax Act, particularly Section 33 which deals with Personal Relief and Relief for Children, dependants etc. This has now being replaced with a Consolidated Relief Allowance (CRA) of N200,000 + 20% of gross income.

They have also reviewed Minimum Tax upwards from 0.5% to 1% and the Tax Table has also being notably amended.

In this article, we will demonstrate how your personal income tax is calculated using the example of a tax payer named Mr Ahmed;

How to calculate your tax payable

Mr Ahmed earns an Annual Salary Package of N3 million including leave allowance. Mr Ahmed also contributes 2.5% of his basic to the National Housing Fund to enable him secure a loan.

Lets take you though these steps to calculate his taxable income;

(Remember CRA replaces all reliefs including transport, leave allowance, rents etc.)

Step 1:
For tax purposes we can break-down his salary as follows;


Step 2

Following which we can now apply the Consolidated Relief of N200,000 plus 20% of Earned Income and also deduct exceptions such as National Housing Fund Contribution (NHF) which is 2.5% of your Basic and also Pension which is 8% of your Basic+Housing+Transport to arrive at your Taxable Income; Please see below;


Step 3

Mr Ahmed will now be taxed on N1,986, 538.35 using the new tax table.

From the table above, Mr Ahmed will expect an annual tax deduction of N305, 173.05 or a monthly tax deduction of N25, 431.09. This is a 10.17% effective tax rate for Ahmed.

And this is what his take home will look like

 

The amended law makes it very easy to calculate income taxes unlike before, thus eliminating most of the loopholes that was previously being exploited by tax payers.

But how can I reduce my taxable income?

The new PAYE template introduced in 2012 makes it more difficult to reduce the amount of taxable income you are subjected to. However, there are still some thing you can do to reduce your taxable income.

Pension – To encourage pension contribution the government allows employees contribute more than 8% of your basic, housing and transport as pension contribution. By doing so, you get more tax reliefs thus lower taxable income. Using the same example above, assume you decide to increase your pension contribution from 8% to 10%, your monthly taxes reduce to N24, 623 as depicted below;

It is important to add that by doing this your take home pay will reduce as your salary will be deducted for the extra pension that you contribute. However, you get compensated for this by the extra return you earn on your pension contributions as well as paying lower taxes. Also, assuming you decide to resign and cash in on your pension within 5 years of contributing it, the new pension reform act of 2014 requires that the additional portion contributed will be taxed. Therefore, you will also have to have contributed it for a period of over 5 years to get a tax rebate.

Life Assurance – Life Assurance premiums are those premiums you pay towards insuring an immediate family member in the event that you die. There is no limit to how much you can contribute and how much relief you can get from it. The higher your life assurance, the higher the relief that you get. In the same example above, assuming Mr Ahmed paid a premium of N500k in life assurance during the year and also contributes 10% as pension, His taxes will look like this;

You can see that the tax per month has dropped to N16, 139 per month as against N24, 623 when he didn’t pay premiums on life assurance. Just like the increase in pension contribution, this also dents your take home but you get the benefit similarly.

Below is a simple template to help calculate your taxes by yourself. Send us an email or drop a comment if you have issues using it. Help us to help you.

Download (XLSX, 25KB)

Note: This is an updated version of this article which originally appeared on Ugometrics (now Nairametrics) in 2012.

Nairametrics

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

What others say about : Salary Earner? How To Calculate Your Taxes Using The New PAYE..


Ralph

Can you please confirm if there has been a change in the template since the recent amendment in June. Cheers.

osh

Am having issues with this tax issue deduction. Was trying to figure something out but looks complicated…if i may ask, someone who has an annual gross pay of 4026000…how much is meant to be deducted for PAYE and contributory pension monthly? I’ll L?k to get the answer in my email addy…thanks in advance

John Chiokwe

This is dependent on what your allowed amount is and your gross pay. Is either 1% of gross pay or (Gross Pay – 200000 -20% of Gross Pay- Other Reliefs) subjected to tax calculator – the one that is higher is used.

Betty

Thanks, very informative article, please do you sometimes give lectures as relates to taxation and other related concepts as it applies to the workforce.

ALIEMEKE IKECHUKWU

IS There a lay down yardstick for determining what percentage goes to basic, housing, transport, utility and others? or is just base on individual assumptions

Chido

Hello. On the taxable income calculation, the template seems to be calculating the LAST 300,000 first before the first 300,000; contrary to what you have on this page. For instance, on a taxable in come of 400,000, I noticed that the template uses 100,000 on 7% and the next 300,0000 on 11% instead of 300,000 on 7% and 100,000 on 11%.

Is it an error? Please clarify.

GERALDINE

SO I CAN USE THE TAX TABLE ABOVE TO COMPUTE PAYE FOR MY EMPLOYEES? ALSO IS THERE A STANDARD RATE FOR MEAL,ENTERTIANMENT ETC. OR ITS JUST INDIVIDUAL ASSUMPTIOM.

Victor C

I see the salary is broken down on your excel sheet .
Do you have a sheet that actually works for consolidated wages ?

Also some employers pay the 18% pension contribution for their employees . In this case the person is left with only VC -voluntary contributions as per tax laws. Does your sheet account for this contribution ?and how much tax does it reduce by if it does . Thanks

GERALDINE

i earn 200,000 monthly,and my firm has not registered with pension fund and national housing fund. so,basically we dont have any relief yet. what would be my tax.

Melissa

Thank you for this post. It has helped me a great deal. Though i know absolutely nothing about taxes [the part that has 1st 300,000 next 300,000 is greek to me!!]
But using the table i can input the figures i have and get the tax needed. Do you have any idea at all how i can construct a basic payroll sheet? You’re free to laugh before replying.
Thank you

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