Everything You Need To Know About PAYE In Nigeria 

Everything You Need To Know About PAYE In Nigeria 

How PAYE Works in Nigeria

PAYE in Nigeria is a convenient and efficient tax system that deducts income tax from employees’ salaries. Learn about tax bands, rates, and the benefits of PAYE, ensuring you understand and comply with your tax responsibilities.

As an employee in Nigeria, you might have noticed a deduction labelled “PAYE” on your salary slip. PAYE stands for Pay As You Earn, and it is a crucial aspect of the country’s tax system. In this article, we’ll decode PAYE and explain how it works in Nigeria, making it easier for you to understand this essential part of your earnings.

What is PAYE?

PAYE, which stands for Pay As You Earn is a tax system designed to collect income tax from employees in a way that is convenient and efficient. (NB: you can refer back to our article on personal income tax to see rates applicable to you). Moving on, instead of employees paying their income tax separately, employers deduct the tax from their salaries before paying them. The deducted tax is then remitted to the relevant tax authority on behalf of the employees. So essentially, PAYE is just a system or method to collect your personal income tax.

PAYE in Nigeria
PAYE

How is PAYE Calculated in Nigeria?

Tax Calculation: The process begins by determining an employee’s tax liability based on their total income, which includes salary, bonuses, allowances, and any other taxable benefits. The tax authorities also consider various tax reliefs and allowances that the employee may be eligible for.

Progressive Tax Bands: Nigeria’s PAYE system operates on a progressive tax structure. This means that as employees’ income increases, they move into higher tax brackets with corresponding higher tax rates. Different income ranges have specific tax bands and rates applied to them.

Annual income (NGN*)Personal income tax (PIT) rate (%)
First 300,0007
Next 300,00011
Next 500,00015
Next 500,00019
Next 1,600,00021
Above 3,200,00024

Tax Deduction at Source: Once the tax liability is calculated, employers are responsible for deducting the corresponding tax amount from their employees’ salaries each month. These deductions are made before employees receive their paychecks, hence the term “Pay As You Earn.”

Timely Remittance: Employers have the responsibility of remitting the deducted taxes to the relevant tax authority on behalf of their employees. This ensures a consistent and efficient flow of tax revenue to the government. The due date for remitting this tax is within ten days of the following month.

What is the minimum PAYE in Nigeria?

The minimum Pay As You Earn (PAYE) tax threshold in Nigeria is currently ₦30,000 per month. This means:

  1. Employees earning less than ₦30,000 monthly are exempt from paying PAYE tax.
  2. Only income above ₦30,000 per month is subject to PAYE tax deductions.
  3. The taxable portion of income above ₦30,000 is taxed at 7% up to ₦120,000 annually.
  4. Income between ₦120,000 – ₦240,000 is taxed at 11% annually.
  5. Income above ₦240,000 is taxed at 15% annually.

These tax bands and rates apply after the standard consolidated relief allowance of 20% of gross income plus ₦200,000.

So in summary, under the current PAYE system, Nigerian employees do not pay income tax on their first ₦30,000 of monthly salary income. Any amount above this threshold is subject to PAYE tax at rates of 7%, 11% or 15% depending on the tax bracket.

The minimum PAYE of ₦30,000 provides some income protection and tax relief for lower-earning individuals. The thresholds and rates are periodically reviewed and updated by the Joint Tax Board and Federal Inland Revenue Service.

What is the penalty for PAYE in Nigeria?

Here are some key penalties for PAYE non-compliance in Nigeria:

  1. Late PAYE remittance – 2% of the amount payable per month of default.
  2. Failure to deduct or remit PAYE – Principal sum + 10% interest + 5% penalty.
  3. Late filing of PAYE returns – ₦50,000 first month; ₦25,000 subsequent months.
  4. Incorrect PAYE returns – ₦25,000 per incorrect return.
  5. Failure to register employees for PAYE – ₦50,000 per employee.
  6. Under-remittance – 10% of tax underpaid.
  7. Tax evasion – Payable tax + 100% of tax evaded.

Some other PAYE offenses like failure to file employee records or submit tax clearance certificates also carry fines between ₦50,000 to ₦500,000.

The penalties are imposed by the relevant tax authorities like the Federal Inland Revenue Service. The aim is to enforce compliance and deter PAYE avoidance.

It is important for employers to fully understand their PAYE obligations and timelines to avoid infractions that lead to these steep penalties. Proper PAYE administration should be a top compliance priority.

How can I reduce my PAYE tax in Nigeria?

Here are some tips to legally reduce your PAYE tax burden in Nigeria:

  1. Claim all applicable tax relief allowances like housing, transportation, disability etc. Make sure your employer is deducting the right amounts.
  2. Contribute the maximum amount to your pension under the contributory pension scheme. Pension contributions reduce taxable income.
  3. Take advantage of tax exemptions for items like NSITF contributions, NHIS premiums, gratuities etc.
  4. If self-employed or a business owner, properly deduct allowable business expenses to lower taxable profit.
  5. Explore investment options like real estate investment trusts that offer tax advantages.
  6. Look for tax savings by contributing to a registered charity or non-profit organization. This may provide tax relief.
  7. Operate a side hustle or business eligible for small business CIT exemption. This allows ₦500k in untaxed income.
  8. Ensure proper tax planning & deductions in any other income like investment income, bonuses, commissions etc.
  9. Continually educate yourself on PAYE policies and reforms to leverage updates that benefit employees.

The key is utilizing all available exemptions, reliefs, deductions, allowances and exclusions permitted under Nigerian tax laws to legally minimize your PAYE burden. Consult a professional advisor if needed.

Can I claim a tax return from PAYE in Nigeria?

Yes, employees who pay Pay You Earn (PAYE) tax in Nigeria can claim a tax refund if they overpaid tax during the year.

You can file your PAYE tax return to claim any excess tax paid if your tax deductions from employment income exceed your actual tax liability for the year. To get a refund, you need to file your annual tax return along with proof of total earnings and taxes paid for the tax year.

The tax authority will verify if you overpaid based on allowances, exemptions, reliefs you qualify for and your tax brackets. Both private and public sector employees are eligible for a PAYE tax refund if they meet the criteria.

There is typically a 6-year time limit to claim a PAYE tax refund in Nigeria from the date the overpayment occurred. The tax authority may offset any outstanding liabilities you have against your refund amount. You can file your PAYE tax return online through e-filing portals or submit physical returns.

So in summary, yes Nigerian employees can recoup excess PAYE tax paid by filing an annual return just like anywhere else in the world. Ensure you maintain proper records and file on time to claim your eligible refund.

Is overtime taxable in Nigeria?

Yes, overtime pay is taxable income in Nigeria under the Pay As You Earn (PAYE) system. Here are some key points on how overtime pay is taxed

All overtime wages, bonuses, and allowances are considered taxable income and subject to PAYE tax. The normal PAYE tax rates apply to overtime pay based on your tax bracket under the graduated tax table. There is no separate overtime tax rate or exemption – standard PAYE rules apply. Your total taxable income including overtime determines which tax bracket you fall under for the year.

Your employer should deduct PAYE tax from overtime pay when making the salary payment, not as a lump sum later. Claiming applicable reliefs can help reduce tax on overtime income like transport allowance. You are required to declare and pay taxes on overtime pay earned to avoid non-compliance issues.

Overtime wages are considered regular taxable income in Nigeria. They do not enjoy any special concessions or deductions under PAYE regulations. Your employer and you both have obligations to account for overtime properly for tax purposes.

Do contract staff pay tax in Nigeria?

Yes, contract staff are also subject to Pay As You Earn (PAYE) tax deductions in Nigeria. Here are some key points on how PAYE applies to contract employees:

The PAYE tax system makes no distinction between permanent and contract employees. The same rules apply. Contract staff whether full-time or part-time are liable for PAYE and must have tax deducted from payments by their employer.

The employer has the obligation to register contract staff for PAYE, deduct tax from salaries, and remit to the tax authorities. Contract employees must be issued PAYE Tax Deduction Cards and tax should be remitted using their PITAN.

Standard PAYE tax rates, thresholds and allowances are applicable based on the contract staff’s compensation package. Contract staff can claim applicable tax reliefs like transport allowance to reduce taxable income. At year-end, the employer should issue a PAYE tax receipt to each contract employee. Short-term contract staff are also liable for PAYE if their salary exceeds the minimum taxable threshold.

So in summary, the duration or nature of the contract does not exempt staff from PAYE obligations. Contract employers and employees must account for PAYE properly.

How do self-employed and freelancers pay PAYE in Nigeria?

Self-employed individuals and freelancers are not subject to Pay As You Earn (PAYE) tax deductions in Nigeria. However, they still have income tax obligations. Since PAYE applies only to employment income, self-employed persons cannot deduct tax from their own revenue/fees. Instead, self-employed individuals and freelancers are expected to compute their tax liability themselves and remit directly to tax authorities.

They are required to register for income tax and file self-assessment tax returns annually based on their income and allowable expenses. Their personal income tax is calculated using the graduated tax rates based on their annual taxable profit. Quarterly instalment tax payments may be required in some states based on the level of income.

Eligible freelancers and self-employed can benefit from the newly reduced small company CIT rate of 0% for the first ₦25 million in turnover. Deducting all allowable business expenses is crucial to reduce taxable income for those self-employed.

So in summary, self-employed persons don’t suffer PAYE deductions but pay personal income tax directly at graduated rates based on annual profits declarations. Proper documentation of income and expenses is key.

>>> Read more: Ultimate Guide to Income Planning and PAYE Withholdings in Nigeria

Is PAYE Charged on 13th-month Salaries in Nigeria?

Yes, 13th-month salaries are subject to Pay As You Earn (PAYE) tax deductions in Nigeria like any other employment income. 13th-month salaries, bonuses, and allowances are considered taxable income under Nigeria’s tax laws. There is no special exemption or separate tax treatment for the 13th month’s pay. It is lumped together with regular salaries for the year when calculating PAYE.

The applicable PAYE tax rate will depend on your cumulative annual taxable income including the 13th-month pay based on the graduated tax brackets. Employers are obligated to deduct PAYE tax from the 13th-month or bonus salaries before payment, just as with normal salaries.

Tax deducted on 13th-month pay should be remitted to tax authorities and included in the company’s total PAYE remittances. Employees can claim relevant reliefs like transport allowance to reduce taxable income on their 13th-month pay.

The 13th-month salary will reflect on the annual tax clearance certificate showing the total taxable pay. 13th-month pay is simply an additional taxable income component that is subject to standard PAYE tax deductions in Nigeria at the applicable marginal tax rate.

Do expatriates pay PAYE in Nigeria?

Expatriate employees in Nigeria are also subject to Pay As You Earn (PAYE) tax deductions like local employees. The PAYE system makes no differentiation between expat and local employees. PAYE applies to all. Expatriate residents who live in Nigeria for at least 183 days in a 12-month period are treated as tax residents.

Income earned in Nigeria by an ex-pat resident is subject to PAYE tax deducted by their Nigerian employer. Applicable PAYE tax rates depend on the expat’s annual income and applicable reliefs based on their personal situation. Some special reliefs may apply to expatriates like overseas leave allowance. Non-resident expats are also subject to PAYE on income earned from Nigerian employment.

Nigeria has double taxation agreements with some countries that allow foreign tax credits. Expats on temporary assignments may be exempted based on visa status and duration. Expatriate quotas and work permits may stipulate payment of matching PAYE by employers. Standard PAYE rules generally apply to expatriate employees in Nigeria, though some special considerations may come into play. Proper tax planning is advisable.

Benefits of the PAYE System

Convenient and Efficient: PAYE simplifies the tax payment process for employees. They don’t need to worry about calculating and paying taxes separately, as it is automatically deducted from their salaries.

Predictable Revenue Stream: For the government, PAYE provides a steady and predictable flow of tax revenue, allowing for efficient financial planning and budgeting.

Compliance and Transparency: PAYE ensures that employees’ taxes are accurately calculated and remitted, promoting compliance with tax regulations and enhancing transparency in the tax collection process.

Encouraging Timely Filing: PAYE encourages employees to file their annual tax returns promptly, providing the tax authorities with vital information for overall tax compliance and effective revenue collection.

>>> Read More: Managing PAYE Compliance and Reporting in Nigeria

The Essence of TIN in the PAYE System

One key element that holds significant importance within the PAYE system is the Individual Taxpayer Identification Number (TIN). The TIN serves as a unique identifier for each taxpayer, allowing the tax authorities to track and manage individual tax obligations effectively. It is a prerequisite for employees to be subject to the PAYE tax system, and obtaining a TIN is an essential step in the tax compliance process.

Having a TIN is vital for employees as it facilitates seamless tax administration and enhances transparency in the tax collection process. With the TIN, employers can accurately identify and record each employee’s tax liability, ensuring that the correct amount of tax is deducted from their salaries. Moreover, the TIN enables the tax authorities to monitor tax payments and verify tax compliance more efficiently. It plays a critical role in minimizing tax evasion and ensuring that all taxpayers contribute their fair share to the nation’s development.

Additionally, the TIN is indispensable for accessing various government services and benefits. From opening bank accounts to conducting business transactions, the TIN is often required for official documentation and identification purposes.

For employees, obtaining a TIN demonstrates their commitment to tax compliance and responsible citizenship. It empowers them to fulfil their tax responsibilities with ease and confidence, knowing that their contributions play a significant role in supporting public services and national growth. Employers, too, play an essential role in ensuring that their employees obtain and provide their TINs. By diligently maintaining accurate records and complying with TIN requirements, employers contribute to a smooth and efficient tax administration process.

Concluding

In conclusion, the Pay As You Earn (PAYE) tax system in Nigeria is a fundamental mechanism for collecting income tax from employees, ensuring a steady and reliable flow of revenue for the government. It simplifies the tax payment process for employees, who need not worry about calculating and remitting taxes separately, as employers take care of deducting and remitting the tax on their behalf. Throughout this article, we have explored various key aspects of PAYE, shedding light on its significance and impact on taxpayers and the nation as a whole.

The PAYE system benefits both employers and employees. For employers, it establishes a clear and efficient process for deducting tax from their employees’ salaries, ensuring compliance with tax regulations. Employers also play a vital role in filing annual PAYE tax returns, providing accurate information about taxes deducted from their employees’ salaries throughout the year. This reporting aids the tax authorities in monitoring tax collections, ensuring transparency, and maintaining accurate financial records.

On the other hand, employees benefit from the convenience of the PAYE system, as it automatically deducts taxes from their salaries. This saves employees the time and effort required to calculate and pay taxes separately, allowing them to focus on their work and other personal endeavours. Additionally, the PAYE system incorporates progressive tax bands, meaning those with higher incomes contribute a higher proportion of their earnings in taxes. This progressive structure promotes fairness and helps distribute the tax burden more equitably.

Lastly, the Individual Taxpayer Identification Number (TIN) holds immense importance within the PAYE tax system in Nigeria. It is not merely a registration number but a key element that strengthens tax compliance, ensures transparency, and fosters responsible taxpaying behaviour among employees. By recognizing the significance of the TIN and adhering to its requirements, individuals and businesses can actively contribute to a well-functioning tax system, promoting economic growth and sustainable development in the nation.

Frequently Asked Questions About PAYE

What is PAYE Tax? 

PAYE stands for Pay As You Earn, and it is a system used in Nigeria to collect income tax from employees. Under this system, employers deduct the tax from their employees’ salaries before paying them and then remit the deducted tax to the relevant tax authority. All employed individuals earning a salary or wage are subject to PAYE tax. Whether you work in the private sector, public sector, or for a government agency, your employer is responsible for deducting and remitting the tax on your behalf. 

What Are Monthly Deductions

Employers deduct PAYE tax from their employees’ salaries on a monthly basis. The amount deducted is based on the employee’s income, deductions, and applicable tax rates. 

What Are Tax Bands and Rates

Nigeria’s tax system uses progressive tax bands, meaning higher incomes are taxed at higher rates. The tax rates and bands are set by the government and may change from year to year. 

What Are Annual Tax Returns

Employers must file annual PAYE tax returns, which provide a summary of the total taxes deducted from their employees’ salaries throughout the year. These returns help ensure accurate reporting and compliance with tax regulations. 

Individual Taxpayer Identification Number (TIN)

To be eligible for PAYE tax, employees must obtain an Individual Taxpayer Identification Number (TIN) from the tax authorities. This unique identifier is used to track tax payments and filings. 

What Are The Benefits of PAYE Tax

PAYE tax is a convenient and efficient way to collect income tax, as it ensures that employees’ taxes are deducted at the source and remitted to the government regularly. It also helps in budget planning for the government and ensures a steady flow of tax revenue. 

What is Tax Relief and Allowance

Employees may be eligible for various tax reliefs and allowances, which can reduce their overall tax liability. Common allowances include housing, transport, and meal allowances. 

What Are The Compliance and Penalties

Both employers and employees are required to comply with PAYE tax regulations. Failure to do so may result in penalties and interest charges. Employers should ensure accurate deductions and timely remittance, while employees should keep track of their salary slips and tax deductions.

Seeking Professional Advice

Understanding tax regulations can be complex, especially for businesses and high-income earners. Seeking advice from tax professionals or consulting with the relevant tax authority can help ensure compliance and optimize tax planning.

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