The Lagos Internal Revenue Service has issued a new guideline for taxation of compensation of employment benefits. This guideline is expected to apply to amount of money paid to an employee whose employment has either been terminated or the employee becomes unable to perform the functions he has been employed for. This money is an income to the employee and is taxable.
Generally, the Personal Income Tax Act exempts this payment of employment termination benefit under it and states that the income will be taxable under the Capital Gains Tax Act.
What Lagos State is saying
LIRS has now given a notice stating that not all employee benefits will be exempted under the Personal Income Tax Act. Here is how;
- Generally for employee benefits to be exempted from Personal Income tax, it must not be pre-agreed with the employer. So in a situation where the contract of employment contains the amount payable as termination benefits, the sum stipulated in that agreement will be subject to Personal Income Tax.
In terms of gratuity payments, they are also exempted from payment of taxes when they are paid under an approved Pension Scheme. However where not under an approved pension scheme and the amount is in excess of N100,000 and the employee has not worked for more than 10 years or the amount of time the employee has worked is not up to 5 years when an aggregate of 63 consecutive months is calculated where employment is not continuous, any benefit gotten from the termination of that employment will be taxable.
For the companies paying these benefits also, the practice of lumping together terminal benefits under compensation for employment will be expected to stop. Each payment component will now be displayed differently with the company notifying LIRS of any payment of compensation for loss of employment and who the money was paid to.