Nigerians that are self-employed or working for an organization in Nigeria, be it in the private or public sector, are subject to PAYE. However, there are some employees, and even employers in Nigeria that do not know the calculation for PAYE. In this article, we’d explain how PAYE is calculated in Nigeria and also share some valuable information we think are helpful.
How to calculate PAYE in Nigeria would be discussed below:
-
A Brief Explanation of PAYE and Indication of Those Subject to Personal Income Tax in Nigeria
In Nigeria, employees of public or private institutions are mandated to pay income tax from their earnings. Salaries, wages, gains, profits, bonuses, premiums, and benefits are examples of employee earnings subject to income tax. The income of self-employed individuals in Nigeria is also subject to income tax.
According to the provisions of the Personal Income Tax Amendment Act of 2011 and the Finance Act of 2020, income tax is to be processed using the Pay As You Earn (PAYE) system. The tax rates of the PAYE system in Nigeria are graduated across income bands, according to the income thresholds, ranging from 7% to 24%.
Employers of labour in Nigeria are responsible for deducting the PAYE tax from their employee’s gross salary. After deduction, the PAYE tax of all employees in the organization will be remitted to the State Internal Revenue Service. In the case where the employee lives and works in the Federal Capital Territory, his employer is expected to remit the PAYE tax to the Federal Capital Territory – Internal Revenue Service (FCT-IRS). Only employers who work in Nigeria and have a permanent base in the country can deduct PAYE tax from their employee’s salaries.
It is important to state that not all Nigerians employed in Nigeria are subject to PAYE. Nigerians working and earning the minimum wage or below aren’t liable to pay PAYE. Since the current minimum wage in Nigeria is N30,000, it means any person with a gross annual income of N360,000 or less is exempted from paying income PAYE tax.
-
What Income is Subject to PAYE in Nigeria?
The following are considered chargeable income applicable to PAYE in Nigeria:
- Salary
- Wages
- Professional fees
- Employment allowance
- Workplace compensation
- Premiums earned
- Bonuses
- Any amount or expenses incurred by the employee during the performance of their duty
- Any prerequisite given, granted, or allowed by an employee
The above applies to both self-employed Individuals as well as employees of private or public organizations in Nigeria. However, before deductions can be made for PAYE tax, there are allowable deductions that first must be excluded from the taxable income. Allowable deductions are expenses incurred to produce taxable incomes and are therefore exempted from PAYE taxation in Nigeria. The following are allowable deductions in Nigeria:
- 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
According to the foregoing, PAYE tax can only be deducted from an employee’s salary after the total of allowable deductions is subtracted from gross income.
Another important piece of information to put in mind is that under Nigerian income tax laws, all taxable persons are entitled to a consolidated relief allowance of 20% of gross income plus the higher of 1% of gross income or N200,000.
-
What is the PAYE Tax Rate in Nigeria?
The PAYE tax rate in Nigeria is between 7% to 24% of the taxable income of an employed individual in Nigeria. Depending on the income level of an employed person in Nigeria, the PAYE could be 7%, 11%, 15%, 19%, 21%, or 24%. That is to say, an increase in income causes the PAYE rate to increase too. The table below shows the graduated PAYE tax table in Nigeria:
| Yearly Taxable Income (Gross income – allowable deductions) | Tax Rates | 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% | The difference between the total taxable income and the N3.2 million must be taxed |
-
How to Calculate PAYE for a Year in Nigeria
To calculate what your PAYE would be for a year, the first thing to do is to get a detailed break-up of your salary for the year. This includes the total income you earned before the deduction of any tax and the allowable deductibles received for that year. We earlier listed what constituted gross income and what expenses are allowable deductions.
After you might have gotten the figure of your gross income earned in the year in question, as well as the total of the allowable income for the year, you can easily get what your taxable income for the year would be by subtracting allowable deductions from gross income.
Having gotten the taxable (or chargeable) income for the year, use the table we’ve provided above to check the PAYE tax rate applicable to your yearly taxable income. For example, your taxable income for 2022 was N300,000 after you subtracted the allowable deductions from your gross income. According to the table, the PAYE tax rate for N300,000 is 7%, thereby making the tax amount payable for 2022 to be N21,000.
In another example, if the yearly taxable income amounts to N600,000, it means the PAYE tax rate is 11% since N600,000 falls in the category of “Next N300,000”. Since PAYE tax rates are graduated across income bands, the PAYE for a taxable income of N600,000 would be N21,000 + N33,000 = N54,000.
N/B: The PAYE tax calculated in the above examples is for the annual income of an employee.
-
Hypothetical Illustration to Calculate Employee Tax in Nigeria
Let’s calculate the employee tax (PAYE tax) payable to Ben Rufus 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 Ben Rufus’s PAYE for 2022.
We begin by subtracting contributions to the pension fund and consolidated relief allowance of the gross income.
- Contribution to the pension fund is 8% of the gross income = 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.
Below is how we get the consolidated relief allowance for Ben Rufus’s income:
N200,000 is higher than 1% of N9,000,000 (which is N90,000) so N200,000 is selected. Remember we have to add 20% of the gross income (which is 20% × N9,000,000 = N1,800,000).
The consolidated relief allowance for Ben Rufus’s income is therefore the sum of N200,000 and 1,800,000, which equals N2,000,000.
To get the total allowable deductions for Ben Rufus, we sum up his pension contribution and consolidated relief allowance as shown below:
Total allowable deductions = N720,000 + N2,000,000
= N2,720,000
As we’ve calculated Ben Rufus’s total allowable deduction for 2022 to be N2,720,000, we can proceed to find the total taxable income.
Ben Rufus’s total taxable income for 2022 = Gross Salary – Allowable deductions
=N9,000,000 – N2,720,000
= N6,280,000
Ben Rufus’s Total Taxable Income for 2022 = N6,280,000
Now, let’s calculate the PAYE tax Ben Rufus is to pay on N6,280,000 using the tax income band table:
1st N300,000@7% = N21,000 (remaining N5,980,000)
Next N300,000@11%= N33,000 (remaining N5,680,000)
Next N500,000@15%= N75,000 (remaining N5,180,000)
Next N500,000@19%= N95,000 (remaining N4,680,000)
Next N1,600,000@21%= N336,000 (remaining N3,080,000)
Over N3,200,000@24%= N3,080,000 × 24% = N739,000
The total PAYE tax payable per annum= N21,000 + N33,000 + N75,000 + N95,000 + N336,000+ N739,000
= N1,299,200 P.A.
Therefore, Ben Rufus’s employee tax (or PAYE) for 2022 was N1,299,200. In each month of 2022, Ben Rufus’s PAYE tax deduction was approximately N108,266.67.