How to Calculate PAYE Tax in Nigeria - Guide to taxation of employees

December 20, 2022
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A Deep Dive Into PIT and PAYE Tax in Nigeria

Are you a Nigerian citizen working in Nigeria? If yes, you will be subjected to the PAYE tax as part of your employment. In this article, we explore what is the PAYE tax, how to calculate PAYE tax in Nigeria and how to pay PAYE tax in Nigeria.

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Introduction

Personal Income Tax payments on PAYE basis can get complicated and confusing. What's more, without the right information on hand, you may end up paying more tax than you need to.

There are ways to save your hard-earned money and ensure you are regulatory compliant - whether you're an individual filer or a corporate.

In this article, we share key information about how to calculate PAYE tax in Nigeria and how to pay PAYE tax in Nigeria. We also help you reduce your tax liability with helpful tips. Keep reading!

What is Personal Income Tax in Nigeria?

Nigerians working in Nigeria are mandated to pay Personal Income Tax (PIT) every year. This PIT is applicable to anyone employed. This could include anyone who is:

  • Employed with a public or private employer
  • A partner in a partnership firm
  • Works in or leads a joint venture
  • Works at or heads an unincorporated trust
  • Runs a family or a community

The method used by the Nigerian government to calculate and deduct the tax is called PAYE.

What is the PAYE Tax Rate in Nigeria?

PAYE refers to “Pay As You Earn”. It is a method used to deduct personal income tax at the source the moment an employee earns their salary. The personal income tax you pay is then called PAYE tax.

The PAYE tax, once deducted by the employer, is typically remitted to the State Internal Revenue Service. The only exception is when the employee in question is a resident of the Federal Capital Territory, in which case, their PAYE tax is remitted to the Federal Capital Territory - Internal Revenue Service (FCT-IRS).

Employers in Nigeria will tax their employees based on the status of their residency. Nigerians who meet the following pre-conditions will be subjected to the PAYE tax:

  • They are employers who work in Nigeria.
  • They are employers who have a fixed/permanent base in Nigeria.
  • They are employees who work either full or part-time in Nigeria.
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Things to Know about PAYE Tax

Apart from the above-mentioned details, there are a few more things to know about the PAYE tax:

  • First off, the PAYE tax is a method of taxation that is used to process personal income tax.
  • Second, it is taxed on chargeable income, which is calculated after excluding deductions, according to the relevant income-specific tax bracket.
  • Third, it is tax paid by anyone in Nigeria who is in paid employment during the year of taxation.

The only exceptions to these rules are:

  • Anyone who is considered an applicable taxpayer as per Section 2 (1) (a) of the Personal Income Tax (PIT) Act – but who earns less than the National Minimum Wage of 30,000 NGN per year.
  • Anyone covered under section 2(1) (b) of the PIT Act, which includes:
  • Employees of the Nigerian Police Force, Nigeria Navy, Nigerian Army and Nigeria Air Force who are not in civilian roles
  • Nigerian Foreign Service Officers
  • Residents living in the Federal Capital Territory
  • People who reside outside Nigeria and who gain income or profit from Nigeria

Expatriates in Nigeria

The next thing to know about PAYE is if expatriates working in Nigeria are subjected to PAYE tax.

Well, expatriates may come within the purview of personal income tax and PAYE if their work is deemed to be performed either partially or completely in Nigeria. They may be exempted from PAYE tax if they:

  • Are not a resident of Nigeria
  • Have stayed in Nigeria for less than an aggregate of 183 days within a period of 12 months (This includes any temporary leave of absence or annual leaves they take)
  • Are required to pay tax in another country which has a double tax treaty with Nigeria
  • Have an employer who is not Nigerian
  • Their salary is not borne by the employer in a fixed location within Nigeria.

Significant Economic Presence for Individuals

Now, let us consider the taxation rules for foreigners based outside Nigeria but who conduct business in Nigeria.

In 2020, the Finance Act (FA) brought in a few changes, which affected the taxation status of these companies. As per the Companies Income Tax (Significant Economic Presence) Order 2020, a Significant Economic Presence (SEP) Order was made by the Minister of Finance.

The SEP Order outlines the conditions under which Non-Resident Companies (NRCs) and foreign employees offering services in Nigeria can have a taxable presence.

According to this SEP Order, any individual, trustee or executor outside Nigeria providing management, professional, technical, consultancy or digital services to a resident of Nigeria will be subjected to a withholding tax (WHT).

This WHT is typically 5% of the income earned as a result of these activities. Depending on the nature of this international business, the NRC can avail of tax relief under a double tax treaty with Nigeria.

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Key Terminologies

In order to know how to calculate PAYE tax in Nigeria, we need first to understand what certain terminologies mean and what they entail as well. So, let’s take a look at key terms you need to know in PAYE tax:

Chargeable Income

Chargeable income is an individual’s income that is actually charged with the personal income tax in Nigeria. To calculate chargeable income, you will need to include any of the following earnings, as applicable to you:

  • Salary
  • Wages
  • Professional fees
  • Employment allowances
  • Any other profits or gains made from employment, which include:
  • Workplace compensation
  • Bonuses
  • Premiums earned
  • Other eligible benefits
  • Any prerequisites given, granted or allowed by any person (applicable to both temporary and permanent employees)
  • Any amount or expenses incurred by the employee during the performance of their duty.

For this income to be considered chargeable, it must exclude any deductions, as allowed by the Government of Nigeria.

Allowable Deductions

Allowable deductions are defined as any expenses that are incurred necessarily, wholly, reasonably and exclusively for the purposes of producing a taxable income. They are exempted from PAYE taxation in Nigeria.

Generally, the following expenses are deemed allowable deductions in Nigeria:

  • Contributions to the National Health Insurance Scheme
  • Contributions to the National Pension Scheme
  • Life assurance premiums for the taxpayer and their spouse (excludes deferred annuities)
  • Gratuities
  • National Housing Fund
  • Owner-occupied accommodation-related loans and mortgages
  • Personal deductions like charitable contributions, healthcare expenses and medical insurance premiums
  • Personal tax allowances like consolidated relief allowance
  • Business deductions:
  • Interest on borrowings for business purposes
  • Rent and premiums on any land and building used for income-generation activities
  • Repairs and maintenance expenses for income-generation purposes
  • Business/professional subscription costs
  • An additional 20% of gross income is also allowed as a deductible

Rates

In Nigeria, anyone paying personal income tax on a PAYE basis will be subjected to graduated income levels for different income brackets. What this means is that, as your income increases, so does your tax payable.  

Depending on your income level and what tax bracket you fall within, you may be subjected to the following tax rates – 7%, 11%, 15%, 19%, 21% and 24%. A little further in the article, we have provided a detailed PAYE tax table with rates and deduction amounts for your reference.

Minimum Tax

According to the PIT act, every employed Nigerian is subjected to a minimum tax amount that comes to 1% of their gross earnings. This minimum tax is applicable to anyone who either has no taxable income or has a PAYE tax that is less than the minimum tax amount.

Again, the only exception to this rule is employed individuals who earn less than 30,000 NGN per year.

Returns and Due Dates

The PAYE tax returns must be filed by the following due dates:

  • Individuals, which include self-employed persons, individuals on direct assessments and high net worth individuals, must file the PAYE returns of the preceding year before March 31st every year.
  • Employers filing on behalf of their employees must ensure to file their yearly PAYE tax returns before January 31st each year. Remittances are typically made by employers on the 10th day of the month, after the month of the deduction of PAYE.
  • NRCs operating in Nigeria are expected to make remittances for PAYE before the 21st of every month.

Penalties for Non-Payment/Default

Individuals, employers and NRCs failing to meet the deadlines for PAYE tax filing and remittances will be subjected to the following penalties:

  • A fixed penalty of 10% on the amount due. Plus, an interest penalty that is typically between 15% and 21%.
  • On conviction, the guilty parties are subjected to the following penalties:
  • Individuals – 50,000 NGN
  • Employers – 500,000 NGN
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How to Calculate Your PAYE Tax Payable

Now let’s take a look at the PAYE tax rate Nigerians need to pay. To help with the tax calculation, we have given below the step-by-step process for how to calculate PAYE tax in Nigeria.

Step 1 - Get a Salary Break-Up

The first thing you need to do to calculate your PAYE tax rate is to get a detailed break-up of your salary. That will help you understand what is your:

  • Gross income earned that year = Total income before the deduction of any tax.
  • Allowable deductions you receive for the year = Expenses that are exempted from the payment of personal income tax in Nigeria. With proper financial planning, you can make sure you have the highest deductions possible.
  • Chargeable income for the year = Gross income - Allowable deductions.  

Step 2 – Calculate Your Total Taxable Income

Add all of your allowable deductions and calculate the total deductions you are eligible for.

Next, subtract the total deductibles from your gross income.

The amount you have left behind is the chargeable income on which you will pay the PAYE tax rate in Nigeria.

Step 3 – Check the Tax Rates that are Applicable to Your Taxable Income

The Nigerian Government uses a graduated tax rate to ensure individuals who are at different levels of income are taxed accordingly.

We have given below the graduated PAYE tax table in Nigeria to help you know tax rates. All currency values are calculated in Nigerian Naira (NGN).

Step 4 – Calculate the Actual Tax Payable for the Year

Once you calculate the personal income that is taxable for you, you should use the relevant tax rate to calculate the exact amount of PAYE tax you will need to pay.

Notice the use of the terms “First 300,000” and “Next 300,000”. This is because of the nature of graduated personal income taxes in Nigeria. What this means is that you will need to pay the cumulative taxable amount listed in the different income brackets, depending on the increase in your income.

So, if last year your earnings were under 300,000 NGN, then you only needed to pay PAYE tax of 21,000 NGN. But, if your income moves into the 300,000-600,000 NGN bracket, you will need to pay 21,000 + 33,000 NGN = 54,000 NGN as PAYE tax.

This is how your earnings will be taxed until you reach the “over 3.2 million NGN” bracket. In that case, you will need to pay 24% of the difference between 3.2 million and your annual gross earnings.

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An Example as An Illustration

Let’s use a fictitious example to understand how to calculate PAYE tax in Nigeria and what tax rate Nigerians need to pay for their personal income tax under the PAYE method.

Dara is employed as an investment banker in Nigeria. She has earned a gross income of 7 million NGN. She is also entitled to a few allowable deductions this year. This includes the consolidated relief allowance (CRA), 20% of earned income and contribution to the pension fund.

Using this information, we can calculate her personal income tax and determine how much PAYE tax she needs to pay. Note that:

  • CRA is calculated as the higher value between 200,000 NGN and 1% of the gross income.
  • Pension is calculated at 8% of the gross income.

So, now let us calculate Dara's taxable income.

Calculation of Dara's PAYE Tax Payable

Dara’s Gross salary per year: 7,000,000 NGN

Allowable deductions:  

  • CRA – 200,000 NGN (because this is higher than 1% of 7 million NGN = 70,000 NGN)
  • 20% of earned income – 20% of 7 million NGN = 1,400,000 NGN
  • Pension contribution made by Dara – 8% of gross income = 560,000 NGN

Total allowable deductions will come up to = 200,000 + 1,400,000 + 560,000 = 2,160,000 NGN

Dara’s Total Taxable Income = Gross salary – Allowable deductions =

7,000,000 - 2,160,000 = 4,840,000 NGN.

Now, we need to calculate how much tax Dara actually has to pay on her 4.84 million NGN. So, let’s take a look at the PAYE tax table in Nigeria to figure out what graduated tax level she falls under.

According to the table, Dara’s taxable income is above 3.2 million NGN. Therefore, she needs to pay the following tax on her annual earnings:

As you can see, Dara’s tax payable for each tax bracket, up to the final bracket, is the same as listed in the standard table. But you may remember that anyone who earns above 3.2 million NGN must pay 24% tax on the difference between their total chargeable income and the 3.2 million NGN limit.

Therefore, we can calculate Dara’s taxable income for the final tax bracket in this way

(Dara’s chargeable income – 3.2 million NGN) * 24% =

4,840,000 - 3,200,000 = 1,640,000 NGN

1,640,000 * 24% = 393,600 NGN

Since this is a graduated tax, we need to add the taxes payable at all tax brackets to calculate the total tax payable by Dara for this year. This would be =

33,000 + 75,000 + 95,000 + 336,000 + 393,600 = 953,600 NGN.

So, now we know how much tax Dara has to pay. But how much does she actually get to take home as net earnings? This can be calculated as:

Gross earnings – Total tax payable = 7,000,000 - 953,600 = 6,046,400 NGN.

Therefore, Dara’s net earnings for this year will be a little over 6 million NGN, at 6,046,400 NGN.

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How Can I Reduce My Taxable Income?

Every individual and employer filing PAYE tax can reduce the tax they pay by increasing their investment in allowable deductions.

Typically, these deductions include pension contributions, national housing fund, health insurance premiums, gratuities etc. In the section titled “Key Terminologies”, we have provided a comprehensive list of allowable deductions which can help you reduce your taxable income.

You can also use apps like Pillow Fund, which help you make smart investments, allowing you to earn up to 14% interest rate on your deposits. Pillow Fund invests your savings in blue-chip DeFi protocols on blockchain networks, which have the potential for the highest returns. Now you make passive earnings while saving money, reducing your tax liabilities.  

Conclusion

Personal Income Tax and PAYE tax in Nigeria can be complicated without the relevant information at your disposal. Now that you know what PAYE tax is, what the PAYE tax rate in Nigeria is, how to calculate PAYE tax in Nigeria and what the filing dates are, you can go ahead and confidently file your returns!

Frequently Asked Questions

What is the current PAYE tax rate in Nigeria?

The current PAYE tax rate in Nigeria depends on your income level. Currently, the rates range between 7% and 24%. Please check “Table 1” in the article for more information.

Is PAYE tax calculated from your gross salary?

Yes, PAYE is calculated after reducing the allowable deductions from your gross salary. You can find detailed steps for calculating your PAYE tax in the section titled “How to calculate your PAYE tax payable”.  

What percentage of PAYE do I pay?

The percentage of PAYE tax you pay depends on the income you earn. Please check “Table 1” in the article for a breakdown of rates per income bracket. For an example of what the actual payments may look like, please refer to the illustration in “Table 2”.

How much PAYE will I pay on 30,000 NGN?

Anyone earning 30,000 NGN or lesser per year is considered to be earning lower than the National Minimum Wage in Nigeria and is, therefore, exempted from paying PAYE tax.

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