Personal Income Tax and PAYE Calculation

How To Calculate PAYE Under Personal Income Tax Act.

As a business owner, you must understand a bit about Personal Income Tax Act and how it affects your business. When you hire a staff, it is your responsibility to collect a tax form from the State Internal Revenue Service on behalf of the staff. The completed tax form will be returned to the Tax Office. It is your responsibility to withhold tax from your employee’s salary based on Pay As You Earn (PAYE) system under the Personal Income Tax Act and remit the same to the Tax office every month.  Failure to comply can lead to penalty.

What is Personal Income Tax?

Personal Income Tax is applicable to individuals, sole proprietors and partnerships. If your legal business structure is sole proprietorship or partnership, your business will not pay company income tax, instead you are required to pay tax from the profits you earn from the business. Also, if you engage other people as employees, these people are expected to pay tax on their salary. This type of tax is progressive in nature. That is why it is being described as Pay As You Earn. The more you earned, the more tax you pay.

Read Also: Value Added Tax (VAT) in Nigeria

Everyone earning income in Nigeria is expected to pay company income tax except the following categories of people:

  • An employee of the Nigerian Army, the Nigerian Air Force, the Nigerian Navy and the Nigerian Police force other than those who are employed in civilian capacity.
  • Officers of the Nigerian Foreign Service
  • Every resident of the Federal Capital Territory, Abuja
  • A person resident outside Nigeria who derive income or profit from Nigeria

 Income Chargeable Under Personal Income Tax Act

  • Gain or profits from any business, trade, vocation or profession
  • Salaries and Wages
  • Fees
  • Allowances
  • Compensations
  • Bonuses
  • Premium
  • Benefits in kind

Exemptions and Relief Allowances

When your total income has been computed, you are allowed to deduct the following relief allowance and exemptions under the Personal Income Tax (Amendment) Act, 2011 before arriving at your taxable income.

Exemptions:

  • National Housing Fund Contribution
  • National Health Insurance Scheme
  • Life Assurance Premium
  • National Pension Scheme
  • Gratuities
  • Payment for loss of office or employment

Relief Allowance

Consolidated allowance of N200,000 plus 20% of Gross Income, subject to a minimum of 1% of Gross Income whichever is higher.

Tax Rates

After the relief allowance and exceptions had been deducted, the balance of income shall be taxed using these graduated tax rates:

  1. First N300,000 @ 7%
  2. Next N300,000 @ 11%
  3. Next N500,000 @ 15%
  4. Next N500,000 @ 19%
  5. Next N1,600,000 @ 21%
  6. Above N3,200,000 @ 24%

Read Also: How to Obtain Tax Identification Number (TIN) in Nigeria

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