In this article, let’s explain the format of the Pay As You Earn (PAYE) in the Nigerian tax law. I will also use an example of an employee receiving 200,000 per month to explain the format.
Format of PAYE
Below is the format for PAYE.
Explanations of Line Items in the PAYE Format
Gross Salary. The first line item is the Gross salary. This is the annual salary of each employee. It includes transport allowance and other allowable allowances. To arrive at the yearly salary, multiply the monthly salary by 12. For example, if the monthly salary is 200,000 Naira. Then, the annual is 2,400,000 Naira (that is 200,000 × 12).
Consolidated Relief Allowance. This allowance is a legal one. It frees all employees from a huge tax burden. The amount charged as consolidated relief allowance (CRA) is not chargeable to tax. The current rule to calculate this is 200,000 or 1% of Gross salary whichever is higher plus 20 percent of Gross salary.
For the employee receiving 2,400,000 per year, it means that its CRA shall be 680,000 Naira. How? First 1 percent of 2.4 million is 24,000 which is less than 200,000. So, we picked 200,000 Naira. Next, 20 percent of gross salary (that is 0.20 × 2,400,000) = 480,000. CRA is now 200,000 + 480,000. That gives 680,000.
Net Income. This is arrived at by subtracting 680,000 Naira from 2,400,000 Naira. This equals 1,720,000 Naira. That is, gross salary minus consolidated relief allowance.
Tax Exempted in PAYE
A list of line items are exempted from tax based on the tax act. This includes: National health insurance scheme (NHIS), National Building Fund, Pension Fund, life assurance and gratuity. For PAYE, the first three exemptions applied the most. Life assurance may also apply if the employee voluntarily pays a premium for life assurance. Gratuity does not apply to employment. It is given when a person retires from where he or she works.
National Pension Fund. A tax exemption that applies to all staff. The employer is expected to contribute 8 percent and a maximum of 20% of gross monthly salary. And each employee contributes 10 percent. The 10% contributed by employees is exempted from tax to arrive at the chargeable income. Pension scheme is applicable if the entity has a minimum of 15 workers. In the above example, the employee pays 10% of 2,400,000. That is 240,000 per annum.
National Housing Fund. Here, the employee is charged 2.5 percent of his or her monthly salary. Normally, the Federal Mortgage Bank collects, manages and administers the fund. In our example, NHF shall be 2.5% × 2,400,000. Which is 60,000 per year. Failure to charge the employee this deduction will result in a fine of 50,000. Payable by the employer.
National Health Insurance Scheme. This scheme is also a compulsory payment. The employer shall pay 10 percent and the employee pays 5 percent. In the above example, The NHIS is 120,000 Naira (i.e 0.05 × 2,400,000).
Life Assurance. This is applicable if the employee pays a premium to an insurance company for the assurance of his life and the life of his spouse. Premium that is paid on a monthly basis will be summed up to complete a year. This will be included under tax exempted.
Chargeable Income. This is the net income less total tax exempted. In our illustration, the net income is 1,720,000 Naira. Each of the tax exempted will be deducted from this amount to arrive at the chargeable once of 1,300,000 Naira as you may notice in the format of PAYE.
What to do with Chargeable Income
Tax liabilities. This is the amount paid by taxpayers. As you may have noticed from the above format. The first 300,000 of the chargeable income was charged and it resulted in 21,000 Naira. This is how it will continue till the chargeable income is less than the available stage. Like in this example, when the amount charged is at 500,000 @ 19%. The available income is 200,000 Naira. How did I arrive at this?
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The chargeable income that has been charged is 300,000, 300,000 and 500,000. The sum of this is 1,100,000. But the total chargeable income is 1,300,000. The difference is 200,000 Naira. This will be charged with 19 percent. And the tax charged under here is 38,000 has you can see in the table. Therefore, the total tax liability is 167,000 Naira. Which is the sum of all the individual tax liabilities computed. To get the monthly tax liabilities, divide 167,000 Naira by 12.
From the forgoing, I explained each line item on the format of PAYE tax. The format was sourced from the Institute of Chartered Accountants of Nigeria (ICAN) study text. There are rules involved in each of the items. This must be applied to get the chargeable income. Furthermore, in computing tax liabilities a set of percentages are used on the chargeable income.