*NOTE: The article for the above post is now outdated following the 2011 amendment of the Personal Income Tax Law. Head to the links below for easy steps for calculating your taxes based on the new law.
The post below is relevant to the Personal Income Tax Act 2004
This is something a lot of folks find very complicated. Even the tax man find it onerous sometimes. Like the Celine Dion track goes “rain, tax (its inevitable)” they are both things that never change and for that one is best advised to understand taxation in its simplest form. There are lots of taxes we pay everyday as individuals (citizen or visitor).
These taxes can be divided into two; indirect taxes and direct taxes. The indirect taxes are taxes like VAT (Value Added Tax) and (WHT) Withholding Taxes. Direct taxes are basically under what is called Personal Income Tax. It is direct because it is deducted from your earnings. The indirect taxes are not deducted from your earnings rather you pay them when you purchase goods and services like shopping at shoprite or paying for the services of a Lawyer. Personal Income Taxes are what we will attempt to simplify. Personal Income Tax in Nigeria is governed under an act called the Personal Income Tax Act (PITA). For more about Personal Income Tax please see here. Enough with the history lets go straight to the juicy part.
Frank : I work in a bank and each time I get my payslip I always see tax deducted. Some months its the same whilst sometimes it differs. Please how the hell do they calculate tax
Me: Take it easy Frank, its the same with me and several other employees. How much do you earn?
Frank: My salary package N1.2m (that is N100k per month)
Me: Ok! There isn’t any one straight way of calculating your taxes because a lot of how it is calculated depends on the way your Basic Salary and Allowances are broken down. So, to make it simple, I will assume a breakdown for you;
Step 1 – Get the breakdown of the components of your salary. See example below
Basic Salary 690,000
Housing Salary 150,000
Meal Allowance 60,000
Entertainment Allowance 60,000
Utility Allowance 80,000
Transport Allowance 91,000
Leave Allowance 69,000
Step 2. Deduct reliefs and allowances from your salary. The Inland Revenue usually tax you on your entire salaries after deducting some reliefs and allowances. The reliefs and allowances deducted for tax purposes are
Housing – Maximum of N150k per annum
Leave Allowance – Not more than 10% of your Basic Salary
Transport Allowance – N20k per annum
Utility Allowances – N10k per annum
Meal Subsidy – N5k per annum
Entertainment Allowances – N6k per annum
Children Allowance – N2.5k per kid (maximum of 4kids)
Dependent Relative Allowance – N2k per annum (maximum of 2 dependents)
Reliefs are 20% of your Annual Basic Salary plus N5k
NHF (Mandatory National Housing Fund Contribution) – 2.5% of your Basic Salary
Pension Contribution – 7.5% of your Basic plus Transport and Housing Allowances
All of the above get deducted from the N1.2m above.
Step 3 – Calculate the deductions
Annual Salary – 1,200,000
Housing Allowance 150,000
Transport Allowance 20,000
Meal Allowance 5,000
Entertainment Allowance 6,000
Utility Allowances 10,000
Personal Allowance 245,000
Child Allowance 10,000
Dependent Relative 4,000
Leave Allowance 69,000
Total Deductions 606,075 606,075
Balance after deductions (N1,200,000 less N606,075) = N593,925
It is this balance that will now be taxed by the Inland Revenue.
Step 4 – Apply tax rates
You first of all tax the first N160k of the N593,925 in the following order
Taxable Amount – N593,925
5% of 1st 30,000 – 1,500
10% of next 30,000 – 3,000
15% of next 50,000 – 7.500
20% of next 50,000 – 10,000
Total Tax for first N160k is N22k (1.5k+3k+7.5k+10k)
25% of what is left – N433,935 (N593,925-160,000) = N108,481.25
Based on the above your total tax is N108,481.25+22,000 = 130, 481.25 per annum. Per Month it is N10,873.43. Please not that people earning the same salary of N1.2m can actually pay different amount of taxes depending on how well the accounts department or HR department spread your pay package.
You can try juggling the above salary of N1.2m across the various allowances and see which gives you the least tax. Or better still, the following template may be of help.
For Self Employed Individuals, the calculation is somewhat similar to the above. However, the Lagos State Government has provided a table that tax payers can use to determine their own taxes easily. Its called a “Self Assessment” schedule. You find it in most Lagos State Government offices. However, a sample can be found here. Direct Assessment Schedules are not suitable for Salary earners. Its advisable you use the steps detailed above. As an example, a tax payer earning N1m and using the Direct Assessment Schedule ends up paying N177,250 as against N130,481.25 above for an employee earning N1.2m (N200k less). That is because the Self Employed guy for some reason doesn’t get to deduct leave allowance, pensions, and National Housing Fund from the above. I believe, most Self Employed Individuals still don’t mind paying this as the Lagos State Inland Revenue (LIRS) mostly don’t bother assessing them further. The guy may actually earn N1.5m per annum but prefer to state N1m. The LIRS basically use this to drag a lot more people who ordinarily would have been outside the tax net into it. So it’s basically a win win situation.
Note: If you have an “Owner Occupier House” that you pay interest on, then the interest you pay will be added as one of your deduction when you are paying tax. For example if you took a loan to build your house, you live in the house and pay say N1m on interest on loan obtained to build the house, then that amount should be deducted from the taxable income before computing tax.
I hope the above helps.