How to Calculate PAYE Tax in Nigeria
If you live and work in Nigeria, it’s important to understand how to calculate PAYE (Pay-As-You-Earn) tax. This tax is taken directly from your salary every month. This guide will explain how to calculate PAYE tax in Nigeria in simple terms, so you can understand the process and stay compliant with the law.
What is PAYE Tax in Nigeria?
PAYE tax is a tax system where your employer takes out a portion of your salary each month and pays it directly to the government. This means that the tax is paid gradually, and you don’t have to worry about paying it all at once. The money deducted is based on how much you earn, and it is collected by the state government where you live.
Who Needs to Pay PAYE Tax?
In Nigeria, PAYE tax applies to anyone who works for an employer. If you earn a salary, your employer will automatically deduct tax from your pay. This tax is based on how much money you make each year. Some rules apply depending on where you work and where you live, but generally, if you work in Nigeria, you must pay PAYE tax.
How Do You Calculate PAYE Tax in Nigeria?
To calculate your PAYE tax, you need to follow a few simple steps. The main things you need to know are your gross salary and the deductions that reduce it.
Step 1: Calculate Your Gross Salary
Your gross salary is the total amount you earn before any deductions are made. This includes your basic salary, housing allowance, transport allowance, and any other money you receive from your employer.
Step 2: Subtract Deductions
Before calculating your PAYE tax, you need to subtract any deductions from your gross salary. These deductions include:
- Pension Contributions: In Nigeria, you must contribute 8% of your salary to the pension fund.
- Other Deductions: These can include things like life insurance premiums or contributions to the National Housing Fund.
Step 3: Determine Your Taxable Income
Once you have subtracted all the deductions from your gross salary, the remaining amount is your taxable income. This is the amount that will be used to calculate your PAYE tax.
Taxable Income Formula:
Taxable Income = Gross Salary – Total Deductions
Step 4: Apply PAYE Tax Rates
In Nigeria, PAYE tax is calculated using a progressive tax system. This means that the more you earn, the higher the percentage of tax you will pay. Here are the current PAYE tax rates:
- 7% for the first NGN 300,000
- 11% for the next NGN 300,000 (NGN 300,001 to NGN 600,000)
- 15% for the next NGN 500,000 (NGN 600,001 to NGN 1,100,000)
- 19% for the next NGN 500,000 (NGN 1,100,001 to NGN 1,600,000)
- 21% for the next NGN 1,600,000 (NGN 1,600,001 to NGN 3,200,000)
- 24% for income over NGN 3,200,000
Step 5: Calculate Your PAYE Tax
Now that you know your taxable income and the tax rates, you can calculate how much tax you need to pay.
Let’s look at an example:
Example of PAYE Calculation
Suppose your gross salary is NGN 4,000,000 per year. Let’s calculate the PAYE tax step by step.
- Deductions:
- Pension (8% of NGN 4,000,000) = NGN 320,000
- Consolidated Relief Allowance (the higher of NGN 200,000 or 1% of gross income) = NGN 200,000
- 20% of adjusted gross income after pension = 20% of (NGN 4,000,000 – NGN 320,000) = NGN 736,000
- Taxable Income = NGN 4,000,000 – NGN 1,256,000 = NGN 2,744,000
- Tax Calculation:
- First NGN 300,000 at 7% = NGN 21,000
- Next NGN 300,000 at 11% = NGN 33,000
- Next NGN 500,000 at 15% = NGN 75,000
- Next NGN 500,000 at 19% = NGN 95,000
- Remaining NGN 1,144,000 at 21% = NGN 240,240
So, your total PAYE tax for the year would be NGN 464,240.
Due Dates for PAYE Payments
Your employer must deduct your PAYE tax every month and send it to the government. They need to pay this by the 10th of the month after you receive your salary.
At the end of the year, your employer must file a PAYE return. This return shows how much tax was deducted from your salary and sent to the government. The employer must file this by January 31st.
You, as an individual employee, must also file a tax return by March 31st each year.
Conclusion
Knowing how to calculate PAYE tax in Nigeria is important for both employees and employers. It ensures you are paying the right amount of tax and staying compliant with the law. The process is simple once you understand how to calculate your taxable income, apply the tax rates, and subtract any necessary deductions. If you follow these steps, you can easily figure out how much tax you owe each year.
Always remember that your employer is responsible for deducting and paying your tax. However, it’s a good idea to keep track of your income and deductions, so you are sure everything is in order.