P.A.Y.E represents Pay As You Earn. Nigeria adopts a Pay-As-You-Earn (PAYE) system to calculate the personal income tax of employees. It is called PAYE tax.
HOW DOES IT OPERATE?
Salary earners in Nigeria are authorized by the law to pay tax under the Pay As You Earn (PAYE) scheme. Every month a portion of one’s salary is deducted as tax leaving one with a net salary to take home. Taxes under the PAYE scheme falls under the State Inland Revenue Service, meaning that all the taxes you pay are remitted to the state of your residence.
For instance, if you live in Ogun State but work in Lagos, you are liable to pay tax to Ogun State and not Lagos State.
HOW IS IT CALCULATED?
The first taxable income is calculated at 7% then the next at 11%. To calculate subsequent years you add 4 to the previous %rate to get the next rate.
This tax rate progresses from 7 percent to 24 percent of taxable income. The taxable income band ranges from NGN300,000 to above NGN3.2 million in a year.
|ANNUAL TAXABLE INCOME (NGN)||RATE||TAX PAYABLE PER ANNUM (NGN)|
|Next NGN 500,000||15%||75,000|
|Above NGN3,200,000||24%||Multiply only the excess amount over NGN3.2 million by 24%. For example, an annual taxable income of NGN5 million is (5-3.2) million * 24% = NGN432,000.|
Below is the basis of pay as you earn (PAYE) calculation for an individual whose gross income is NGN 4 million. For the purpose of this calculation, it is assumed that pension is calculated at 7.5% of gross income.
|Gross income (GI)||4,000,000|
|Consolidated relief allowance||Higher of NGN 200,000 or 1% of GI||200,000|
|20% of GI||800,000|
|Children||NGN 2,500 per child (maximum of 4)||10,000|
|Dependent relatives (DR)||NGN 2,000 per DR (maximum of 2)||4,000|
|Pension||7.5% of GI||300,000||(1,314,000)|
|Annual income (NGN)||PIT rate (%)||Tax payable (NGN)||NGN|
|Net income after PAYE||3,547,940|