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Financial Literacy

How To Calculate Your Taxes In Nigeria

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*NOTE: The article for the above post is now outdated following the 2011 amendment of the Personal Income Tax Law.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.

How to calculate your PAYE using the new Tax law

Self Assessment Template for calculating PAYE

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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 let’s go straight to the juicy part.

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Frank : I work in a bank and each time I get my payslip I always see tax deducted. Some months it’s the same whilst sometimes it differs. Please how the hell do they calculate tax

Me: Take it easy Frank, it’s the same with me and several other employees. How much do you earn?

Frank: My salary package N1.2m (that is N100k per month)

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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
Total                                    1,200,000

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

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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.

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Step 3 – Calculate the deductions
N                                    N
Annual Salary  –                                                           1,200,000
Deductions
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
NHF                                        17,250
Pension                                     69,825
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.

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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.

Self Assessment

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. It’s 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.

Patricia

Ugo Obi-chukwu "Ugodre" is a chartered accountant with over 16 years experience in financial management, corporate finance and financial analysis. He is also a retail investor and a personal finance advocate with over a decade experience investing in the Nigerian stock market. Ugo is the founder/Publisher of Nairametrics and blogs regularly on the website.

24 Comments

24 Comments

  1. Douglas

    October 5, 2011 at 6:47 am

    Fantastic…been having a lot of running issues with the tax thing in my workplace.I take it this explanation holds for monthly salary earners but in our situation, allowances are computed by day rates and number of days worked; none of the breakdown above applies as such, so how is it going to be worked out?

  2. Ugodre

    October 5, 2011 at 9:54 am

    Thanks Douglas! Including day rates kinda complicates it and the example above doesn't apply to that. However, you can still use the procedure above if you know the break down of what your salaries are for any given month. Just divide the reliefs and allowables by 12 to get the monthly figure. For example, divide Housing of N150k by 12. Also don't forget to divide the taxable amounts you applied the rates on. Meaning instead of applying 5% on N30,000 you apply 5% on N2,500(30,000/12). Hope this helps. Tnx

  3. lawal

    October 5, 2011 at 11:56 am

    good work poster

  4. Anonymous

    December 3, 2012 at 4:57 pm

    What if a tax payer does not receive meal, entertainment and utility allowances from the employer will he be given relief in respect of meal, entertainment and utility?

  5. Obyno

    December 3, 2012 at 5:00 pm

    What if a tax payer does not receive meal, entertainment and utility allowances from the employer will he be given relief in respect of meal, entertainment and utility?

    • ugodre

      December 4, 2012 at 10:02 am

      In practice most organizations include it, regardless of whether it is there or not. But the new tax laws has replaced all those allowances with a consolidated relief allowance

  6. 1062660636

    January 25, 2013 at 11:20 am

    Quite helpful…Thanks

  7. 100000110357582

    January 26, 2013 at 2:37 pm

    na waoh

  8. John

    March 17, 2015 at 8:28 pm

    I buy and sell. My income each month is not stable and it varies 250k to 300k.

    What is the tax amount payable to tax office? What do I need to know.

  9. samuel

    March 27, 2015 at 1:19 pm

    my salary package is 120, 000 per month. kindly break it down for. both monthly deduction and also per annum.
    thank you

  10. ARIYO ADEBAYO

    April 15, 2015 at 3:12 pm

    I want to know whether the above tax rates are still the current applicable rates

  11. Isaac Tarfa

    May 21, 2015 at 6:21 pm

    Kindly calculate the tax to be paid on
    basic salary 125,000
    Housing 62,500
    transport 37,500
    meal allowance25,000
    Gross pay 250,000

    Thanks.

  12. OLA

    October 24, 2015 at 5:22 pm

    Good job at poster.
    What if d salary per anual is not up to. 160,000. How is it going to be

  13. MOSES

    May 3, 2016 at 11:50 am

    If my salary is 130,000 per month, how much is my tax per month according to Lagos state government?

  14. Uduak

    June 27, 2016 at 3:26 am

    I’m still lost on how you arrived at the personal allowance when you were calculating your deductions

  15. lawal

    September 13, 2017 at 3:13 pm

    i don’t agree with you on the first 160000 tax from the amount
    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. i think the 160000 should be deducted from the amount after all deductions N593,925 then find the 25% of your answer and add every thing from 1.5, 3000, 7.5, 10000 and the answer will be taxable amount in Nigeria

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Cryptocurrency

How to become a successful Bitcoin trader

Major steps that are needed if you want to become a successful BTC trader.

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BTC Whales, Bitcoin is scarce, entities, individuals hold for long term

A BTC trader is simply an individual who seeks gains from differential changes in the market price of BTCs. The main objective the BTC trader has in mind is buying prices alow and selling when the flagship currency gains higher. BTC trading can thus be very lucrative and has become one of the fastest-growing careers in the financial spectrum. 

Data obtained from a leading BTC analytic firm, Coinmarketcap showed that the market capitalization of BTC currently stands at over $170 billion. This further illustrates that in 2013 BTC moved from $13.30 to its present-day value of over $9000, meaning that early bird BTC traders had gained over 67,600% since it began. 

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Consequently, this article will show major steps that are needed if you want to become a successful BTC trader. 

Explore Research Data From Nairametrics by Visiting Nairalytics

Self-Control & Discipline  

Adebayo Juwon, an FTX consultant for Africa, spoke to Nairametrics in an exclusive interview, explaining in detail the need for a BTC trader to be very disciplined and have a security-conscious mindset. He said; 

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“Firstly I must note that trading is not for everyone, to be a successful crypto trader, self-discipline is a prerequisite to achieving one’s goal. The crypto market is very much volatile than what the traditional traders are used to, hence more risk and reward. 

“A crypto trader must be security conscious; you’re responsible for your account security in the crypto ecosystem, as hackers are preying on whose account is less secured.” 

READ ALSO: CBN provides guidelines to address credit, liquidity risks, others  

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Risk Management 

A successful BTC trader must be able to understand the relationship between reward and risk management. This entails high understanding levels about the degree of randomness in BTC market and the risk involved in taking such risk. As a successful BTC trader, you are required to understand when its best to trade BTC as market conditions change from time to time. 

Adebayo Juwon, FTX consultant for Africa also added vital points on why a BTC trader should never ignore risk management. He said; 

“Also, to be a successful crypto trader, one must have good risk management in place, in a highly volatile market your profits can be zapped away in minutes. Risk comes in different ways in the crypto market, there are lots of scam projects with the good marketing team, they tend to attract investors also, it’s very important to do your own research in the crypto space, and rely less on market sentiment.” 

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READ MORE: Tether mints 80,000,000 USDT to unknown wallets within 24 hours

Timing 

Recall that some days ago Nairametrics, revealed the best time many BTC traders prefer to take their trading positions in the BTC market, thus preferring to trade around the American trading session because of the high price swings that occur at the start of New York stock market trading time -about 2.30 pm GMT. This means there were higher chances of making more money at the start of  American trading sessions than other trading sessions (London and Asian trading session).  

 

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Basic fundamental and Technical analysis skills 

Every successful BTC trader must keep track of macro fundamentals going around the BTC community because such information more often determines the market price of Bitcoin.  Either rumours or news have exponential effects on the BTC market and often create lucrative trading opportunities. 

Chris Ani, a professional BTC trader in a phone chat interview explained to Nairametrics in detail, the major attribute every successful BTC trader must possess, including the need to have basic trading skills. He said; 

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 “To prevent yourself from becoming a slave to the market, you must be trading small enough size on your trades that you are not emotionally attached to them. Trading opportunities wait for no one. 

“You have no idea when and where they will appear. Whenever they appear, you have to be ready with your trading plan.  You must also master technical and fundamental analysis and most importantly the one that works for me, understand the seasons and market structure so as to know when to trade, allow big wins run, or rather exit the market in order not to lose your money.” 

Finally, it’s very important to understand that no matter how good you get at BTC trading, you will often make mistakes and lose money. Always remember, trades that go bad are part of what will make you successful in the long term. Success in BTC trading simply means you are winning more relatively than losing. 

 

Patricia
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MSME

What SME’s need other than Intervention loans

Since access to finance is a key constraint to SME growth, funding it has become paramount.

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SME's, Here’s why your business needs a solid value proposition (PART 1)

Small and Medium Enterprises (SMEs) play a major role in most economies, particularly in developing countries. According to the World Bank, they represent about 90% of businesses and more than 50% of employment worldwide. Formal SMEs contribute up to 40% of national income (GDP) in emerging economies and these numbers are significantly higher when informal SMEs are included. The World Bank predicts that “600 million jobs will be needed by 2030 to absorb the growing global workforce, which makes SME development a high priority for many governments around the world.  

Since access to finance is a key constraint to SME growth, funding it has become paramount. This has birthed a myriad of programs ranging from incubators to accelerators both locally and internationally giving out loans, grants, and other resources to ensure that the sector is equipped to create jobs and stimulate the overall economy. There have also been federal grants and other forms of support given to SMEs. Since the outbreak of the Covid-19 pandemic, SMEs have been prioritized as recipients to loans and other stimulus packages. The CBN’s N50 billion Targeted Credit Facility (TCF) geared towards supporting SMEs and households whose economic activities have been disrupted by the COVID-19 pandemic, is just one of the different packages that have been put in place to cater specifically to it.  

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While there is data to back the impact SMEs have on our economy, it is true that even though small businesses help the economy, not all small businesses will contribute to the dream – or even survive past its early years.  According to The Better Africa report, by Weetracker, an African digital media company, the top 5 countries that experienced the highest shutdown rates among start-ups between 2010 and 2018 were Ethiopia at 75%, Rwanda at 75%, Ghana at 73.91%, Zimbabwe at 66.7%, and The Democratic Republic of the Congo (66.7%). Failure rate for start-ups in Nigeria averaged 61% over the same period. What this means is that if small business loans are being given to businesses at random in Nigeria, 61% of those businesses are bound to fail and the monies given, completely lost.  

The small business loans being offered by the CBN is a good step in the right direction. However, determining whether it ends up in the hands of the startups that are viable enough to scale and create the jobs or the larger percentage that will fail, depends to a large extent on how they are selectedIn disbursing the loans, there must be clear methods of choosing the recipients. CBN’s N50 billion Covid-19 intervention fund for SMEs in conjunction with NIRSAL Microfinance Bank, simply noted that it would appraise and conduct due diligence applications before sending them to the applications to the CBN for final approval, to CBN for review. The results will tell their story. 

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Why the economy needs more than loans 

The CBN giving out intervention loans is just one part of finding the solution – and this too does not say much about the amount in loans being given and their effect on the economy at large. If it’s too little to make any real difference, then it might only buy many of these businesses a few more months of dogged survival, after which all will be lost.  

The overall operating environment must be able to stimulate growth either through favourable tax incentives for specific industries, moratorium on other forms of loans, or just the provision of basic infrastructures like electricity and speedy internet services.  

READ ALSO: What Nigerian MSMEs must do to thrive in the new normal

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Another important thing is to ensure there is a ready market for businesses within the country. Even with the right federal loans, a business having no ready market will sink its funds into inefficient marketing. This ready market, however, has a lot to do with the ease of local production to ensure competitive pricing, further curtailing the proliferation of imported items, and more. 

In other words, economy will benefit even more from its overall development. The loans might help but, overall, there is unlikely to be sustainable exponential growth until the things that should be in place to expedite the development process exists. 

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Patricia
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MSME

How Nigerian SMEs can survive high mortality rate

SMEs are a very important economic catalyst in developing and industrialized countries.

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More than 40 SMEs in Lagos shut down due to economic crisis

In Nigeria where unemployment is a serious issue, the local businesses have a special position in the industrial sector because it has created employment and has been able to utilise labour. The local businesses, otherwise known as SMEs which means, Small And Medium Enterprise are everywhere, found on every street and corner as they surround us.

There is however no universal definition of SMEs that is widely accepted as it differs and varies from countries, but this is usually based on employment, assets or combination of the two. Institutions and organizations define SMEs in different ways depending on the purpose and the objective. Take for example, according to Organization for Economic Co-operation and Development OECD (2005) SMEs are considered to be independent firms that employ less than a given number of employees. However, SMEs were classified in terms of size, and financial assets.

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The Small and Medium Industries and Equity Investment Scheme (SMIEIs), defined SME as an enterprise with a 200 million naira maximum asset base, with the exclusion of land and working capital and with a workforce of not less than 10 employees and not more than 300 employees. Akabueze,(2002).

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The Third National Development plan of Nigeria (1975 – 1980) defined a small scale business as a manufacturing firm that employs less than ten people, or whose machinery and cost of equipment does not exceed N600,000
The Federal Government Small Scale Industry Development Plan of 1980 defined a small scale business in Nigeria as any manufacturing process or service industry, with a capital not exceeding N150, 000 in manufacturing and equipment alone.

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These definitions give a clearer explanation as to how the meaning of SMEs differs and varies. However, just to give you a clearer understanding of what local businesses or SMEs mean, they are independently owned organisations that require less capital and less workforce and less or no machinery. They are ideally suited to operate on a small scale to serve a local community and to provide profits to the business owners.

READ MORE: FG to disburse N97.3 billion to tech innovators, agric enterprises

Most enterprises in Nigeria, most of which are in the commercial sector are categorized as small businesses. The role of the small and medium enterprises towards the development of Nigeria is of great importance as it has contributed greatly to the country in terms of growth and development and also in providing employment opportunities.

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From seminars to workshop initiatives for SMEs both locally and internationally, a lot is being said about SMEs all over the World.

According to the Central Bank of Nigeria report (2003), SMEs are a very important economic catalyst in developing and industrialized countries.

According to the United Nations Industrial Development Organization (UNIDO), developing countries can conquer poverty and inequality by democratizing, deregulating, and liberalizing the integration of the global economy. Recent studies have shown that SMEs contribute to over 55% of GDP and over 65% of total employment in high-income countries also that SMEs and informal enterprises account for over 60% of GDP and over 70%of total employment in middle-income countries (OECD, 2004).

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READ ALSO: These Nigerian businesses are being affected by COVID-19

However, considering the term “small”, there’s a whole lot of enormous challenges that come with it. In Nigeria, the factors working against the development and growth of local businesses are quite numerous, some of which include:

1. The issue of funding is a major problem with SMEs in Nigeria. However, the problem is not how to source it but the accessibility to either short or long term loans.

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2. Lack of infrastructural facilities is a serious impediment to the performance of SMEs. The problem of inadequate infrastructural facilities includes electricity, good road network, availability of potable water, and solid waste management. These infrastructures are left to the business owners to provide themselves.

  1. Poor Management and Low Entrepreneurial Skill Base is a serious clog in the survival of small businesses as there is a lack of essential and required expertise in business which leads to wrong and costly decisions and mismanagement.
  2. Entrepreneurs often blame their failures on inadequate sales. However, the problem lies with poor marketing skills that could help promote their sales.
  3. Most entrepreneurs go into business without proper planning by taking a realistic view of what their strengths and weaknesses are, let alone giving careful consideration and analyzing the economic trends or business conditions in that particular sector of activity, which sometimes leads to mishandling when the business starts to expand.
  4. The root of most employee problems in Nigeria is poor personnel management. They put aside personnel matters till crises set in. Such crises usually pose serious threats to the firm’s survival if they are not promptly looked into.
  5. The harsh deteriorating macroeconomic environment in Nigeria has adversely affected the performance of small business enterprises and has posed as a major challenge to their survival and growth. Most small business enterprises are struggling with the problem of uncertainty caused by the unstabilized macroeconomic environment and policy shifts.

With all of this ongoings, some of the solutions preferred to ease these challenges include:

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1. The need for government, and non-governmental organizations to create Seminars and workshops initiatives and other forums, to establish a platform for the interaction of SMEs owners/managers with others which can help to improve on their management capabilities.

2. Government should also provide the necessary infrastructures in order to ease the burdens and thereby encourage and promote rural industrialization.

3. The SME owners/managers should strive to develop effective marketing strategies in order to boost business operations which will become profitable.

4. It is important for SMEs to develop good personnel management policies to avoid crises that could affect their business.

5. Local business owners should take to proper planning, realizing his strengths and weaknesses before diverting into any business to avoid mishandling.

6. Goverments should help create a macroeconomic environment that is stable as it will enable these local businesses to make reasonable forecasts on costs, turnover, and return on investment.

7. The government should help in making funds easily accessible to SME owners/managers, be it short or long term loans that could help to encourage them to execute their business plan.

8. SMEs operators should also develop their competences in managing and sustaining their businesses by constantly engaging in training, research and development.

 

Patricia
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