If you work for yourself, with the government, or in the private sector in Nigeria, income tax is a compulsory tax you must pay. Income tax, which is sometimes referred to as employee tax, is imposed on salaries, wages, gains, profits, bonuses, and premiums derived from employment. If you’re an employer of labour, it’s your responsibility for making the deductions for this tax from your employees’ monthly salary. And as an employee, you’d want to be sure that the deduction from your salary for income tax is what it should be. Read on as we explain how employee tax is calculated in Nigeria.
How to calculate employee tax in Nigeria would be discussed below:
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What is Employee Tax in Nigeria?
Employee tax, also known as income tax, is imposed on the income of employed Nigerians, whether they be self-employed or working in the public or private sector. The Personal Income Tax Amendment Act of 2011 and the Finance Act of 2020 govern and regulate employee tax in Nigeria.
The incomes of employees and self-employed individuals in Nigeria that are subject to employee tax in Nigeria include salary, wages, professional fees, employment allowance, workplace compensation, premiums, and bonuses. And the Pay As You Earn system, widely referred to as PAYE is used to process employee tax for Nigerians with gainful employment.
It should be noted that employed individuals in Nigeria who earn the minimum wage or below are exempted from paying employee tax. That is, individuals earning N30,000 or lesser a month are not expected to pay employee tax. For those earning above the minimum wage, PAYE tax is deducted from their gross salary by their employers. Thereafter, employers are expected to remit the PAYE of their employees to the State Internal Revenue Service. The PAYE tax of Nigerian workers residing and working in the Federal Capital Territory is expected to be remitted to the Federal Capital Territory – Internal Revenue Service (FCT-IRS).
Before PAYE is deducted from the gross salaries of employees in Nigeria, allowable deductions must first be subtracted from the taxable income. The allowable deductions exempted from the PAYE tax include the following:
- Contributions to the National Health Insurance Scheme
- Contributions to the National Pension Scheme
- Gratuities
- National Housing Fund
- Owner-occupied accommodation-related loans and mortgages
- Personal deductions like charitable contributions, healthcare expenses, and medical insurance premiums
- Consolidated relief allowance and other kinds of personal tax allowances
- Interests on borrowings for business purposes
- Rent and premiums on any land and building used for income-generation purposes
- Repairs and maintenance for income-generation purposes
- Business/professional subscription costs
- An additional 20% of gross income is also considered a deductible
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How to Calculate Employee Tax in Nigeria
As we stated several times in this piece, Pay As You Earn (PAYE) is the system used to process income tax (also known as employee tax) in Nigeria. Tax rates for employee tax in Nigeria are graduated across income bands, ranging from 7% to 24%. The table below shows the PAYE tax rates and their applicable income threshold:
| Yearly Taxable Income (Gross income – allowable deductions) | Tax Rate | Total Amount Payable Per Year |
| First N300,000 | 7% | N21,000 |
| Next N300,000 | 11% | N33,000 |
| Next N500,000 | 15% | N75,000 |
| Next N500,000 | 19% | N95,000 |
| Next N1.6 million | 21% | N336,000 |
| Over N3.2 million | 24% |
Before any deduction for PAYE tax can be carried out, every allowable deduction from the employee’s gross income must first be subtracted. Earlier in the article we listed out what constitutes allowable deductions (take a look at the list again). After the allowable deductions are subtracted from the gross salary, what remains is the taxable income that is subject to employee tax, i.e. PAYE.
For example, after allowable deductions have been subtracted from the annual gross income of an employee and the taxable income that remains is N300,000, the PAYE would be N21,000, which is 7% of the taxable income. If the annual taxable income of the employee falls in the income threshold of “Next N300,000” (check the table above), for example, an annual taxable income of N600,000, the PAYE payable would be N21,000 + N33,000 = N54,000. The reason for this is that PAYE tax rates are graduated across income bands.
N/B: Gross income’ means income from all sources less all non-taxable income, income on which no further tax is payable, tax-exempt items listed in paragraph two of the sixth schedule Of the Personal Income Tax Act, and all allowable business expenses and capital allowances.
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Hypothetical Illustration to Calculate Employee Tax in Nigeria
Let’s calculate the employee tax (PAYE tax) payable to Adegoke Stephen for 2022, an investment banker that earned a gross income of N9 million in 2022. He is entitled to a few allowable deductions that include a consolidated relief allowance and a contribution to the pension fund.
Using the provided details, let’s calculate Adegoke Stephen’s PAYE for 2022.
We begin by subtracting contributions to the pension fund and consolidated relief allowance of the gross emoluments.
- Contribution to the pension fund is 8% of the gross emoluments = 8% × N9,000,000 = N720,000
- Consolidated Relief Allowance is calculated as the higher value between N200,000 and 1% of the N9,000,000, plus
20% of the gross income.
But before we proceed, let’s calculate Adegoke Stephen’s gross income. Remember ‘Gross income’ means income from all sources less all non-taxable income, including pension contributions as in the case of Stephen Adegoke.
Since Stephen Adegoke makes pension contributions, we would have to subtract N720,000 (which is the value of his pension contribution) from N9 million (the value of his gross emoluments) to get his gross income. His gross income will be N8,280,000.00.
Below is how we get the consolidated relief allowance for Adegoke Stephen’s gross income:
N200,000 is higher than 1% of N8,280,000.00 (which is N82,800) so N200,000 is selected. Remember we have to add 20% of the gross income (which is 20% × N8,280,000.00 = N1,656,000).
The consolidated relief allowance for Adegoke Stephen’s income is therefore the sum of N200,000 and 1,656,000, which equals N1,856,000.
To get the total allowable deductions for Adegoke Stephen, we sum up his pension contribution and consolidated relief allowance as shown below:
Total allowable deductions = N720,000 + N1,856,000 = N2,576,000
As we’ve calculated Adegoke Stephen’s total allowable deduction for 2022 to be N2,576,000, we can proceed to find the total taxable income.
Adegoke Stephen’s total taxable income for 2022 = Gross Salary – Allowable deductions
=N9,000,000 – N2,576,000= N6,424,000
Adegoke Stephen’s Total Taxable Income for 2022 = N6,424,000
Now, let’s calculate the PAYE tax Adegoke Stephen is to pay on N6,424,000 using the PAYE tax income band table:
1st N300,000@7% = N21,000 (remaining N6,124,000)
Next N300,000@11%= N33,000 (remaining N5,824,000)
Next N500,000@15%= N75,000 (remaining N5,324,000)
Next N500,000@19%= N95,000 (remaining N4,824,000)
Next N1,600,000@21%= N336,000 (remaining N3,224,000)
Over N3,200,000@24%= N3,224,000 × 24% = N773,700
The total PAYE tax payable per annum= N21,000 + N33,000 + N75,000 + N95,000 + N336,000+ N773,700
= N1,333,760.00 P.A.
Therefore, Adegoke Stephen’s employee tax (or PAYE) for 2022 was N1,333,760.00. In each month of 2022, Adegoke Stephen’s PAYE tax deduction was approximately N111,146.67.