Introduction

Employees, self-employed individuals, and business owners in Nigeria are all required to pay taxes on their personal income. One of the critical deductions from an employee’s gross income is tax, which leaves them with their net income, or take-home pay. This article delves into the Pay As You Earn (PAYE) tax system in Nigeria, a fundamental tax type that individuals remit to the Federal Inland Revenue Service (FIRS) within their state of residence. Based on the Personal Income Tax Amendment Act of 2011 and the Finance Act of 2020, which took effect on January 1, 2021, this guide answers crucial questions on calculating PAYE in Nigeria.

Key Points About PAYE Tax in Nigeria

1. Gross Emolument: This includes any salary, bonus, fee, and benefits in kind received by an employee.
2. Non-Taxable Allowances and Reliefs: Certain allowances and reliefs, such as consolidated relief allowance, gratuities, contributions to approved pension funds, and life insurance premiums, can reduce taxable income.
3. Penalties for Non-Payment: Failure to pay PAYE incurs a penalty of 10% per annum of the due amount, plus interest at the bank lending rate.
4. Currency: Taxable income is calculated in Nigerian Naira.
5. Worldwide Income: Residents of Nigeria are taxed on their worldwide income, meaning income received both within and outside Nigeria.

Who Should Pay PAYE in Nigeria?

According to the Personal Income Tax Amendment Act (PITAM), tax liability in Nigeria is based on source and residency rules. An employee is taxed if they:

1. Work fully or part-time in Nigeria.
2. Have an employer in Nigeria.
3. Work for an employer with a fixed base in Nigeria.

Non-residents are generally not liable to pay taxes in Nigeria. However, expatriates are liable if they work in Nigeria under the following conditions:

1. Their employer is not resident in Nigeria.
2. They stayed less than 183 days in any 12-month period.
3. Their employer bears the employee cost.
4. They have paid tax in another country.

Foreign individuals earning business profits from Nigeria are taxed under Section 6 of the Personal Income Tax Act (PITA) once a fixed base or taxable presence is established. Additionally, Section 6(A) introduces Significant Economic Presence (SEP) rules for personal income tax, allowing non-residents to seek tax relief under a double tax treaty.

What is Chargeable Income?

Chargeable income refers to income from all sources minus non-taxable income, income on which no further tax is payable, allowable business expenses, and capital allowances. This is also known as taxable income.

How to Calculate PAYE in Nigeria

PAYE is calculated based on an individual’s earnings, with rates ranging from 7% (for annual income less than NGN 300,000) to 24% (for annual income exceeding NGN 3,200,000). Those earning minimum wage or less are exempt from personal income taxes. Every taxable person, except those earning minimum wage or less, is liable to a minimum income tax of 1% of their gross income. As per the Finance Act 2020, a low-income earner is defined as someone earning the national minimum wage, currently NGN 30,000 per month or NGN 360,000 annually.

PAYE Tax Rates and Due Dates in Nigeria

PAYE rates progress from 7% to 24% of the taxable income. Employers must deduct PAYE tax from employees’ salaries monthly and remit it to the relevant Nigerian authorities by the 10th of the month following the salary payment. Individuals must file their returns by March 31st each year for the previous year.

Employers are also required to file PAYE returns twice a year on behalf of employees, submitting the following documents:

1. Form H1 (Employer Declaration Form): Details employees’ income, taxes deducted, and taxes remitted in the previous year. Due by January 31st.
2. Form G (Employer Remittance Card): Shows monthly remittances and receipt reference numbers, accompanied by copies of receipts. Due by January 31st of the following year.
3. Form A (Annual Declaration of Individual Income and Claims for Allowances and Reliefs Form): Due by March 31st of the current year.

Conclusion

Understanding and complying with PAYE tax regulations in Nigeria is crucial for employees, self-employed individuals, and business owners to avoid penalties and ensure smooth financial operations. By being aware of their tax obligations and the various reliefs and allowances available, taxpayers can effectively manage their finances and contribute to the nation’s economic development. Always consult a qualified tax advisor for personalized guidance to navigate the complexities of the Nigerian tax system efficiently.

For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Inner Konsult Ltd at www.innerkonsult.com at Lagos, Ogun state Nigeria offices, or www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.