Have you ever wondered what some of the small deductions that appear on your payslip when you receive your salary are for? Well, one of them is the Pay-As-You-Earn (PAYE) tax. Nigerian law requires wage employees to pay tax under the Pay-As-You-Earn (PAYE) scheme. You receive a net salary each month after a percentage of your pay is withheld for taxes.
It’s likely that some of you have questioned what Pay-As-You-Earn is, and you have probably wondered if it is the same as Personal Income Tax (PIT). This article explains Pay-As-You-Earn Tax as it relates to employee taxation in Nigeria; the laws governing PAYE tax payment; and how to calculate PAYE taxes for employees in Lagos.
Personal Income Tax (PIT) and Pay-As-You-Earn Tax
The levy on an individual’s, a trustee’s, or an executor’s income is known as Personal Income Tax (PIT). An employer withholds Pay As You Earn (PAYE) taxes from employees’ salaries and pay. Based on the guidelines of Section 81 of the Personal Income Tax Act (PITA), this tax deduction is also known as Personal Income Tax. PITA is applicable to all forms of income that an individual receives. The Personal Income Tax Amendment Act of 2011 (PITAM) and the Finance Act of 2020 are Nigeria’s two main pieces of legislation that guide PAYE taxes.
The cost of an individual’s Pay-As-You-Earn tax
Nigeria uses a Pay-As-You-Earn (PAYE) method to determine an employee’s personal income tax. The tax is known as PAYE. The tax percentage increases from 7% to 24% of taxable income. A year’s worth of taxable income is between NGN300,000 and NGN3.2 million.
Where to pay your Pay-As-You-Earn Tax
Every individual or employer is liable to pay their Pay-As-You-Earn Tax to the Inland Revenue Service in the state they are located. All taxes paid under the PAYE plan are paid to the state in which you reside since they fall under the purview of the State Inland Revenue Service. You must pay tax to Ogun State rather than Lagos State, for instance, if you live in Ogun State but work in Lagos.
Pay-As-You-Earn Tax Conditions
Every employee pays their PAYE taxes based on their residence. The following conditions must be met for an employee to be considered a tax resident:
- If your employer is in Nigeria
- Your employer is based permanently in Nigeria.
In Nigeria, an overseas worker could also be subject to taxation unless their;
- The employee has lived abroad and paid taxes there.
- The employee has been in Nigeria for less than 183 days in any 12-month period.
- The employer is not a Nigerian resident.
Pay-As-You-Earn (PAYE) Tax Calculation Using Regular Income
Calculating your PAYE Tax can be confusing if you are not so aware of how to go about it. And it slightly differs from state to state. For this article, we are considering how to calculate your PAYE Tax if you reside in Lagos or your employee is in Lagos.
The PAYE Tax is calculated using both your regular income and irregular income. When calculating your PAYE tax, the distinction between regular and irregular revenue should be made clear. Anything that is paid on a regular basis, like wages and commissions, is considered regular income. Anything that isn’t, like an annual bonus, is considered irregular income.
A period’s total PAYE obligation is determined as follows:
Total PAYE = PAYE on regular income + PAYE on irregular income
|Annual taxable income (NGN)||Rate||Tax payable per annum (NGN)|
|Above 3,200,000||24%||Multiply only the excess amount over NGN 3.2 million by 24%. For example, an annual taxable income of NGN 5 million is (5-3.2) million *24%= NGN 432,000|
In cases where a person has no taxable income or if the PAYE tax is lower than the minimum tax, a minimum tax of 1% of gross income will be applied. A low-income earner in Nigeria is exempt from the minimum tax, nonetheless.
Note: A low-income earner is one who makes the National Minimum Wage or less, according to the Finance Act 2020. In Nigeria, the barrier is now 30,000naira per month, or 360,000naira annually.
In conclusion, the calculation of the PAYE tax is subject to change based on the law and regulations of the PIT. Therefore, it is important to keep checking this from time to time.