Understanding How to Calculate PAYE Tax is essential for compliance and effective financial management in Nigeria. This guide will walk you through the steps involved in calculating PAYE tax in Nigeria, covering the main components and providing examples to illustrate the process.

Calculate PAYE: Everything You Need To Know About PAYE Calculation In Nigeria

Salary earners in Nigeria are mandated by law to pay tax under the Pay As You Earn (PAYE) scheme. Every month a portion of your salary is deducted as tax leaving you with a net salary to take home.Taxes under the PAYE scheme fall under the jurisdiction of the State Inland Revenue Service, meaning that all the taxes you pay are remitted to the state of your residence.For example, if you live in Ogun State but work in Lagos, you are liable to pay tax to Ogun State and not Lagos State.

How can you Calculate PAYE PAYE (Pay-As-You-Earn) Tax in Nigeria?

PAYE is a tax system where employers deduct income tax from employees' salaries before payment. This system simplifies tax collection for the government and ensures that employees pay their taxes gradually as they earn.The Personal Income Tax (PIT) Act governs this system, and the rates are structured progressively based on income levels. 

Taxable Income

To calculate PAYE, first determine the employee's taxable income:
  1. Calculate Gross Salary: This includes basic salary, housing, transport, and any other allowances.
  2. Deductions: Subtract mandatory deductions such as pension contributions (typically 8% of gross income) and any other applicable deductions (like life insurance premiums or contributions to the National Housing Fund).
  3. Taxable Income Formula:
    Taxable Income=Gross Salary−Total Deductions

PAYE Tax Rates

The PAYE rates in Nigeria are progressive and are structured as follows:
  • 7% for annual income up to 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.
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Step-by-Step Process for Calculating PAYE

To calculate PAYE, first determine the employee's taxable income:
  1. Calculate Gross Salary: This includes basic salary, housing, transport, and any other allowances.
  2. Deductions: Subtract mandatory deductions such as pension contributions (typically 8% of gross income) and any other applicable deductions (like life insurance premiums or contributions to the National Housing Fund).
  3. Taxable Income Formula:
    Taxable Income=Gross Salary−Total Deductions

Example Calculation

Let’s consider an example for clarity. Assume an employee has a gross annual salary of NGN 4,000,000. The calculation would proceed as follows:
  1. Calculate Deductions:
    • Pension (8% of NGN 4,000,000) = NGN 320,000
    • Consolidated Relief Allowance = 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
  2. Total Deductions:
    Total Deductions=NGN320,000+NGN200,000+NGN736,000=NGN1,256,000
  3. Taxable Income:
    Taxable Income=NGN4,000,000−NGN1,256,000=NGN2,744,000
  4. Calculate PAYE:
    • 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 (from NGN 2,744,000) at 21% = NGN 240,240
    Total PAYE = NGN 21,000 + NGN 33,000 + NGN 75,000 + NGN 95,000 + NGN 240,240 = NGN 464,240.

Who Should Pay PAYE in Nigeria?

According to the Personal Income Tax Act, tax in Nigeria is based on source and residency rules.An employee is taxed if the;
  • Employee works fully or part-time in Nigeria
  • Employer is in Nigeria
  • Employer has a fixed base in Nigeria
 Often, non-residents aren’t liable to pay taxes in Nigeria. However, a non-resident person (an expatriate) is liable to pay taxes if they have employment in Nigeria unless the;
  • Employer is not a resident in Nigeria
  • Employee stayed less than 183 days in any period of 12 months
  • Non-residents employer bears the employee cost
  • Employee has paid tax in another country
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Note: Foreign persons earning business profits from Nigeria are taxed under Section 6 of the PIT Act (PITA) once a fixed base or taxable presence is created.Also, Section 6(A) of PITA introduces the Significant Economic Presence (SEP) rules for personal income tax (PIT), whereby it outlines that a non-resident person may seek tax relief under a double tax treaty. Nonetheless, by order, the Minister of Finance may define what activities constitute SEP for this purpose.

Due Dates for PAYE Payments in Nigeria

Employers are required to deduct monthly PAYE tax from employees’ salary and remit it to the relevant Nigerian authorities on or after the 10th day of the month following the payment of salary.Individuals must file the return no later than 31st March each year in respect of the previous year.Additionally, an employer is supposed to file PAYE returns twice a year on behalf of employees. They should also submit the following documents while filing:
  1. Form H1 (Employer Declaration Form) - this form shows employees’ income, taxes deducted and taxes remitted in the preceding year. The due date for form H1 is 31st January.
  2. Form G (Employer Remittance Card) - this form shows monthly remittances and reference numbers on the receipt. Copies of receipts should also accompany form G. The due date for form G is 31st January of the following year.
  3. Form A (Annual Declaration of Individual Income and Claims for Allowances and Reliefs Form) - its due date is 31st March of the current year.
The new Finance Bill signed into law on the 13th of January 2020 places more stringent penalties for default of payment of PAYE tax. It is a wake-up call for individuals and every Nigerian business owner to understand and diligently remit PAYE taxes to the relevant authorities.
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