Payroll refers to the total amount of money that a company pays to its employees for their work during a specific period, typically on a regular basis, such as monthly or biweekly. This encompasses not only the regular wages or salaries earned by employees, but also any supplementary remuneration such as bonuses, commissions, and allowances.
What is Payroll Deduction in Nigeria?
Employers in Nigeria must comply with tax laws by deducting income tax from employees’ salaries. As part of the payroll process, employers also have a responsibility to withhold income tax and social security contributions. In Nigeria, income tax applies to various forms of compensation, including salaries, wages, bonuses, premiums, and benefits. This tax is calculated and reported monthly through the PAYE system to the relevant State Internal Revenue Service or FCT-IRS for employees residing within the Federal Capital Territory.
Recommended reading: All you need to know about Companies’ Income Tax in Nigeria
How is Employee Tax Calculated in Nigeria?
In Nigeria, the assessment of PAYE income is derived from an individual’s earnings. Adopting the Pay-As-You-Earn (PAYE) approach, Nigeria employs this system to compute employees’ income tax, hence known as PAYE tax. This tax rate gradually escalates from 7% to 24% based on the taxable income, covering a range of ₦300,000 to over ₦3.2 million annually. The following guide can be followed in calculating the PAYE tax.
Annual Taxable Income (NGN) | Rates | Tax Payable per annum (NGN) |
First 300,000 | 7% | 21,000 |
Next 300,000 | 11% | 33,000 |
Next 500,000 | 15% | 75,000 |
Next 500,000 | 19% | 95,000 |
Next 1,600,000 | 21% | 336,000 |
Above 3,200,000 | 24% | Multiply only the excess amount over NGN 3.2 million by 24%. |
For instance, Oluwatosin is a startup founder who lives in Ogun state but works in Lagos state. She commutes to Lagos on a daily basis. She earns N5m on an annual basis. She is entitled to a few allowable deductions this year. This includes the consolidated relief allowance (CRA) and contribution to the pension fund. The CRA is calculated as the higher value between 200,000 NGN and 1% plus 20% of the gross income while pension is calculated at 8% of the gross income.
Note that Total Taxable Income = Gross salary – Allowable deductions
So, now let us calculate Oluwatosin’s taxable income.
Oluwatosin’s Gross salary per year: 5,000,000 NGN
Allowable deductions:
- CRA – 200,000 NGN (because this is higher than 1% of 5 million NGN = 50,000 NGN)
- 20% of earned income – 20% of 5 million NGN = 1,000,000 NGN
- Pension contribution made by Dara – 8% of gross income = 400,000 NGN
Total allowable deductions will come up to = 200,000 + 1,000,000 + 400,000 = NGN1,600,000
Oluwatosin’s Total Taxable Income = Gross salary – Allowable deductions =
5,000,000 – 1,600,000 = 3,400,000 NGN.
Therefore, Oluwatosin’s annual taxable income of NGN 5 million = NGN 3,400,000.
The collection of a tax imposed on an individual’s income will be determined by looking at the territory of residence where the individual concerned is deemed to be a resident. It is not where the place of work of the concerned individual will determine the state that will collect tax. Rather, it is the place of residence or the principal place of residence that will determine which state will collect the tax. From the illustration above, it can be deduced that her Personal Income Tax will be paid to her place of residence which is Ogun State.
The next question is what amount of PAYE will be deducted from an annual Salary of NGN 5m? It is important to note that PAYE is charged on taxable income. From the above, Oluwatosin’s taxable income is above 3.4 million NGN. Therefore, she needs to pay the following tax on her annual earnings:
Annual Taxable Income (NGN) | Rates | Tax Payable per annum (NGN) |
First 300,000 | 7% | 21,000 |
Next 300,000 | 11% | 33,000 |
Next 500,000 | 15% | 75,000 |
Next 500,000 | 19% | 95,000 |
Next 1,600,000 | 21% | 336,000 |
Last 200,000 | 24% | 48,000 |
Total payable Tax | 608,000 |
Individuals who have neither taxable income nor meet the minimum PAYE tax requirements will be subject to a minimum tax rate of 1% of their gross income.
Remittance of PAYE Tax
PAYE must be remitted on or before the 10th day of the month following the payment of salary (e.g., PAYE tax deducted from January salary should be remitted by the 10th of February).
Penalty for Non-payment of Tax
Employers are required to deduct monthly PAYE from their employees’ salary and forward it to the relevant authority within 10 days of the following month. Failure to pay incurs a penalty of 10% per year, along with annual interest at the bank lending rate (typically ranging from 15% to 21%). Late filing results in fines of ₦500,000 for corporate bodies and ₦50,000 for individuals.
Is There a Minimum Number Before PAYE Sets In
No, there is no minimum number. The law in Nigeria requires an employer to remit PAYE tax for their employees even if it is one except where exempted under law.
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Pls i need clarity on two things:
1. if the taxable is not up to 300,000, can i use the amount like that on the 7%
2. Is it a must to pay pension and paye for a staff that just join the company 6 days for the month to end, meaning the staff work for 6 days for that month.
Thanks in advance for your swift response.