Tax is a compulsory payment to the government of a country. As a citizen or a person you are expected to pay tax on every income earned or unearned. Also, foreigners are expected to pay tax in their country of residence for more than a particular number of days or months. For individuals, tax is charged on either the wages or salary earned or from business income or both. In this article and a series of others, the focus is on PAYE, (Pay As You Earn). Let’s begin!
Definition — What is PAYE Tax?
It is a form of personal income tax that charges a particular rate or rates to the income earned by individuals from employment. It is charged on the wages and salary of the individual taxpayer. PAYE may also be defined as tax paid on a monthly basis on the salary of individuals before receiving take home pay.
Personal Income Tax. PAYE is a form of personal income tax (PIT). It is derived from the PIT act. In Nigeria, the current act is the PITA 2011 as amended. This act covers the regulation, guidelines, penalties and rates for calculating income received from employment and business income.
There is also the finance act. It is a fiscal policy act enacted every year. This is true in Nigeria. The finance act of 2020 established that individuals with a salary less than 30,000 will not pay minimum tax. The minimum rate is 1 percent of net salary. And net salary or taxable income is paid after deducting consolidated relief allowance, pension and other allowable deductions.
Income earned. Salary is part of earned income. Other earned incomes are business income, vocational and partnership income. There is also unearned income from dividend, rental, bonuses and commission. Pay As You Earn focuses on income received from salary and wages as a result of being gainfully employed.
Rates for PAYE. The rates for PAYE in Nigeria may be quite different from other countries. The table below shows how individuals are charged on their taxable income. When a person’s salary is below 300,000 Naira. Such individuals pay a minimum tax. This is 1 percent.
How PAYE Tax is Calculated
Although this article does not focus on the practical aspect of calculating PAYE, it gives a gleam of it. The monthly salary of the individual is added up for the year. Then the consolidated relief fund is deducted from it. Next, the National Pension fund, life assurance policy, National housing fund and National health fund will be deducted from the balance thereof.
The difference is what is referred to as taxable income. After this, the rate will be applied to get the tax payable. Normally, PAYE is payable on a monthly basis. Therefore, the tax payable is divided by 12 to get the amount paid each month by each employee.
PAYE system of tax is charged on the salary and wages of employees. In Nigeria, it is coined from the Personal Income Tax Act, 2012 as amended. There are certain applicable rates to the taxable income. In calculating it, the total emolument for the year is used to get the tax payable. Thereafter, it is divided by 12 to arrive at the monthly PAYE paid.