Statutory Deductions in Nigeria: A Comprehensive Overview And Detailed Guide

Nigeria's employee pool is the diversity of languages spoken among the workforce. Nigeria is incredibly linguistically diverse, with multiple ethnic groups and languages spoken. While English is the official language and widely used in business and administration, many employees in Nigeria are multilingual.

This linguistic diversity highlights the adaptability and communication skills of the Nigerian workforce, as individuals often navigate between multiple languages and cultural contexts in their daily interactions.

Startups, small businesses, and even corporations would benefit from the diversity of this workforce.

However, maintaining employees in Nigeria requires a detailed understanding of the statutory deductions to ensure compliance with Nigerian laws. The guide below provides extensive details of Nigerian statutory deductions. 

What are Statutory Deductions?

Statutory deductions in Nigeria are mandatory deductions from employees' salaries or wages as required by law. These deductions are needed for funding specific government programs, social security, and other statutory obligations.

Statutory deductions in Nigeria serve several important purposes for both employees and the government. They include:

• Revenue Generation for Government: Statutory deductions contribute to the government's revenue. These funds are essential for financing public services, infrastructure development, and various government programs.
• Social Security and Welfare: Deductions like pension contributions contribute to employees' social security and welfare. These funds provide financial security, affordable housing, and healthcare benefits to workers.
• Workplace Safety and Employee Compensation: The Employee Compensation Act Fund ensures that there is a mechanism that compensates workers who suffer from work-related injuries or death. This promotes workplace safety and protects the financial well-being of workers.
• Legal Compliance and Accountability: Statutory deductions ensure that employers comply with relevant laws and regulations. They create a system of accountability, preventing tax evasion and other forms of non-compliance. 

Statutory Deductions in Nigeria

Employees who fulfill statutory obligations in Nigeria qualify for a reduction in their gross income when calculating the Consolidated Relief Allowance. The following outlines the statutory contributions that employees and employers must make in Nigeria:

National Housing Fund (NHF)

The NHF was initially established by Act 3 of the 1992 NHF Act. The fund aims to provide Nigerians loans for renovating, developing, or buying houses. Regular contributors can get long-term loans from mortgage institutions. 

All Nigerian employees may access the NHF scheme if they are 21 and earn a minimum of NGN3,000 annually. Employers must register employees with NHF and contribute 2.5% of their basic salary.

Employees must remit the amount in one month after the payday.  Late remittance attracts a penalty of NGN50,000. 

National Health Insurance Scheme (NHIS)

The NHIS is another deduction in Nigeria. Its purpose is to provide affordable healthcare for all Nigerians. Employers with at least 10 employees should register their workers and contribute the amount each month.

Employers must contribute 10% of the basic monthly salary and deduct 5% of the employee's salary towards this fund. The health fund covers the employee’s spouse and four biological children under 18. If the employee has more than 6 family members, they may register the additional people as dependents. 

Personal Income Tax (PITA)

Personal Income Tax is income taxation for individuals, trustees, and executors. Nigeria's primary legislations governing this deduction are the Personal Income Tax Amendment Act of 2011 and the Finance Act of 2020. The tax liability for employees is determined by their residency status, which is established if the employee:

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• Works partially or fully in Nigeria,
• The employer is situated in Nigeria, OR
• The employer maintains a fixed base in Nigeria.

According to Nigeria’s Pay-As-You-Earn (PAYE) system, taxes are directed to the state of residence. So, for example, if an employee lives in Ogun State but works in Lagos State, their taxes go to the Ogun State Government.

PIT applies to the employee’s taxable income, calculated by subtracting the total relief and exemptions from the employee's overall gross income. Then, authorities use the following rates to calculate PIT per PAYE system:

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Annual Taxable Income (NGN)

PIT Rate (%)

First 300,000

7

Next 300,000

11

Next 500,000

15

Next 500,000

19

Next 1,600,000

21

Over 3,200,000

24

Pension Fund

The Pension Fund is a structured social protection initiative covering all employees within a company. In Nigeria, employee pensions are regulated by the 2004 Pension Reform.

Under the Pension Reform Act, the worker and employer contribute a minimum of 10% and 8% of the employee’s monthly compensation, respectively. Alternatively, an employer may make the whole contribution. In this case, the minimum should be 20% of the employee’s monthly pay. 

Employees should open a retirement savings account with an approved Pension Fund Administrator, to which the employers remit the deductions. The deadline for paying the funds is seven working days after payday. Lack of compliance leads to a 2% penalty of the unpaid amount. 

Industrial Training Fund (ITF)

The Industrial Training Fund (ITF) operates as a government parastatal within the Federal Government of Nigeria, falling under the Ministry of Industry, Trade, and Investment jurisdiction. The agency aims to promote and stimulate skills development in the industrial and commercial sectors.

The Industrial Training Fund (ITF) applies to employers with a minimum of 5 employees and an annual turnover of NGN50 Million. These employers must contribute 1% of their annual payroll to the ITF.

By providing appropriate documentation as evidence of this contribution, an employer becomes eligible for a refund, receiving 50% of the amount contributed.

Nigeria Social Insurance Trust Fund (NSITF)

The Nigerian Social Insurance Trust Fund (NSITF) applies to all employers and employees across public and private sectors. Members of the Armed Forces are exempt from the scheme.

As part of their obligations, employers must contribute 1% of their employees' monthly payroll to the NSITF. This contribution ensures that a compensation fund is in place to support workers or their dependents in the unfortunate event of work-related incidents or health issues.

Note that this deduction is not from an employee’s salary. Rather, it is a statutory contribution by an employer. The deadline for the contribution is before the 16th day of the succeeding month after payday. Failure to contribute attracts a penalty of 10% of the unremitted amount. 

A Blueprint for Sustained Growth

Understanding Nigeria's statutory deductions is not merely a compliance exercise; it's a blueprint for sustained growth. As employers embark on this journey, they contribute to the prosperity of their businesses and the collective progress of Nigeria's vibrant and diverse economy. 

Take advantage of Workpay’s calculator, which ensures you remit the right deductions every time. Get in touch to learn more.