Understanding PAYE Tax in Nigeria

The Pay-As-You-Earn (PAYE) tax system is a way for the Nigerian government to collect taxes from people's salaries. In this guide you will learn about everything you need to know about PAYE tax in Nigeria so you're better guided.

What is PAYE Tax?

PAYE tax is a tax that employers take out of employees' salaries before the salaries are paid. The employers send this tax money to the Federal Inland Revenue Service (FIRS) or the State Internal Revenue Service (SIRS).

Why is PAYE Important?

PAYE tax, just like most other taxes, is important because it helps the government get a steady revenue. The money from taxes is used to fund public services like healthcare, schools, and roads. For employees, the PAYE system makes paying taxes easier since the money is taken out automatically.

What is Taxable/Chargeable Income?

In Nigeria, the chargeable or taxable income is the total income earned by an individual or a company that is subject to taxation after allowable deductions, exemptions, and reliefs have been taken into account.

For individuals, taxable income typically includes salary, wages, bonuses, commissions, rental income, dividends, interest, and any other income earned during the tax year. Certain deductions, allowances, and reliefs may be available to reduce the taxable income, such as contributions to pension schemes, mortgage interest relief, and allowable business expenses.

Once all allowable deductions and reliefs are subtracted from the total income, the remaining amount is the chargeable income, which is then subjected to the applicable tax rates according to the Nigerian Personal Income Tax (PIT) Act or the Companies Income Tax (CIT) Act for companies.

The computation of PAYE (Pay As You Earn) tax for individuals involves applying the appropriate tax rates to the chargeable income after taking into account any reliefs and allowances for the relevant tax year.

How is PAYE Calculated in Nigeria?

PAYE is calculated based on taxable income (also known as chargeable income). The amount of PAYE tax you pay depends on how much you earn. The more you earn, the higher the tax you pay. We'll give an example but before that, here's a breakdown of the PAYE tax rates:

• First ₦300,000: 7%
• Next ₦300,000: 11%
• Next ₦500,000: 15%
• Next ₦500,000: 19%
• Next ₦1,600,000: 21%
• Above ₦3,200,000: 24%

Example PAYE Calculation

Let's say your annual taxable income is ₦1,500,000. Here's how your PAYE tax would be calculated:

• First ₦300,000 at 7%: ₦300,000 * 0.07 = ₦21,000
• Next ₦300,000 at 11%: ₦300,000 * 0.11 = ₦33,000
• Next ₦500,000 at 15%: ₦500,000 * 0.15 = ₦75,000
• Remaining ₦400,000 at 19%: ₦400,000 * 0.19 = ₦76,000

Total Annual PAYE Tax: ₦21,000 + ₦33,000 + ₦75,000 + ₦76,000 = ₦205,000

Total Monthly PAYE Tax: ₦205,000 / 12 ≈ ₦17,083.33

What is Minimum Income Tax?

In Nigeria, if you earn the minimum wage or less, you have to pay a minimum income tax of 1% of your gross income. This means everyone pays something, even if they don't earn much.

How to File PAYE Tax

Employers are responsible for filing PAYE tax for their employees. Here's how they do it:

1. Calculate the total annual income of the employee.
2. Apply the tax rates to determine the total tax.
3. Deduct the tax from the employee's salary and send it to the tax authorities.

Benefits of PAYE Tax

• Convenient: Employees don't need to worry about filing taxes themselves.
• Compliant: Employers ensure that taxes are paid on time, reducing the risk of penalties.
• Steady Revenue: Provides the government with a steady stream of money for public services.

Common Questions about PAYE Tax

1. Is PAYE tax different from income tax?
PAYE is a method of collecting income tax from employees. It's not a separate tax but a way of making sure income tax is paid regularly.

2. What happens if an employer fails to remit PAYE tax?
Employers may face penalties and interest charges for not sending PAYE tax on time. It's important for employers to follow tax rules to avoid these penalties.

3. Can employees claim refunds on PAYE tax?
If an employee pays too much PAYE tax, they can ask for a refund. This usually involves submitting a tax return at the end of the financial year.

Conclusion

Understanding PAYE tax in Nigeria is important for both employers and employees. It makes sure taxes are paid on time and helps fund the country's development. By knowing the tax rates, you can better manage your finances and follow tax laws. If you have any questions or need help, it's a good idea to talk to a tax professional.