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Do you know how PAYE in Nigeria works? For an employee earning a salary or wage, taxes are deducted from their gross income—the total amount they earn before any deductions have been made. Part of the taxes deducted is PAYE.
Employees, self-employed individuals, and business owners are required to pay taxes on personal income. Tax is among the expenses deducted from an employee’s gross income, leaving them with a net income (what an employee takes home after all deductions).
The Pay As You Earn (PAYE) is one of the vital types of taxes in Nigeria that individuals pay to the Federal Inland Revenue Service within their respective state of residence. Personal Income Tax (PIT) is based on two primary legislations, i.e., the Personal Income Tax Amendment Act 2011 and Finance Act 2020 (It took effect on 1st January 2021). This article is a guide to PAYE in Nigeria and answers some of the critical questions related to calculating PAYE.
According to the PITAM Act, tax in Nigeria is based on source and residency rules.
An employee is taxed if the;
Often, non-residents aren’t liable to pay taxes in Nigeria. However, a non-resident person (an expatriate) is liable to pay taxes if they have employment in Nigeria unless the;
Note: Foreign persons earning business profits from Nigeria are taxed under Section 6 of the PIT Act (PITA) once a fixed base or taxable presence is created. Also, Section 6(A) of PITA introduces the Significant Economic Presence (SEP) rules for personal income tax (PIT), whereby it outlines that a non-resident person may seek tax relief under a double tax treaty. Nonetheless, by order, the Minister of Finance may define what activities constitute SEP for this purpose.
Income chargeable to Personal Income Tax refers to income from all sources minus all non-taxable income, income on which no further tax is payable, allowable business expenses, and capital allowance. Chargeable income is also known as taxable income.
In Nigeria, PAYE income is calculated based on the amount an individual earns. The tax rate progresses from 7% (if your annual income is less than NGN 300,000) to 24% (if your annual income is more than NGN 3,200,000) of an employment taxable income. However, those earning minimum wage or less from employment are exempted from personal income taxes.
It’s also worth noting that every taxable person (except persons who earn the minimum wage or below) is liable to a minimum income tax of 1% of their gross income. According to the Finance Act 2020, a low-income earner is a person who earns the national minim wage or less. Currently, the threshold is at NGN 30,000 per month or NGN 360 000 annually.
If your income is more than NGN 300,000, the rates are calculated differently as outlined in the table below in the next section;
As outlined above, PAYE tax rates progress from 7% to 24% of the taxable income. The below table shows personal income tax rates in Nigeria.
Multiply only the excess amount over NGN 3.2 million by 24%.
For instance, the annual taxable income of NGN 4 million is NGN 192,000, equivalent to 24% of the NGN 800,00 (excess amount over NGN 3.2 million).
Employers are required to deduct monthly PAYE tax from employees’ salary and remit it to the relevant Nigerian authorities on or after the 10th day of the month following the payment of salary.
Individuals must file the return no later than 31st March each year in respect of the previous year.
Additionally, an employer is supposed to file PAYE returns twice a year on behalf of employees. They should also submit the following documents while filing:
Here is a free calculator for calculating PAYE in line with the Finance Act. It also helps you calculate other statutory deductions in Nigeria, such as pension, National Housing Fund, National Health Insurance Scheme, etc.
The PAYE tax rate for expatriates or foreign persons is the same for residents
One may use the Tax Clearance Certificate (TCC) of the employee issued by the Federal Inland Revenue Service (FIRS) for companies or State Inland Revenue Services for individuals. Alternatively, a person may use an extract of Form H1 return.
Yes, the law in Nigeria requires an employer to remit PAYE tax for their employees except where exempted under law.
Workpay in Nigeria automates the payroll processes for employers to ensure that the PAYE calculation is error free and updated according any changes in the tax laws. Reach out to the team here to learn more.
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