PAYE TAX simply means Pay As You Earn Tax. It is personal income tax which every income earning individual in Nigeria is expected to pay to the relevant tax authority. Before now, there have been different rates applied in computing the personal income tax of individual incomes.
With the coming into effect of the Personal Income Tax (Amendment) Act of 2011, the graduated rates and reliefs have been streamlined; thus, to implement the 2011 Tax law, the following should be done.
1- Determine the gross income of your employees.
2- Subtract N200.000 (or 1% of the gross income, whichever is higher) from the gross income
3- Find 20% of the gross income and also deduct this from the gross income.
4- Deduct 8% of the gross income as pension deduction (excepting the salary is structured in a way that you can determine basic salary, rent and housing allowances, and then the 8% will be based on the sum of basic salary, rent and housing allowance)
5- Deduct 2% of the basic salary from the gross income as housing fund contribution under the National Housing Fund Act (if the employees are contributing towards housing in line with the National Housing Fund Act.
6- If your employees have life assurance policy, deduct the insurance premium amount from the gross income.
7- If your employees have been enrolled for the National Health Insurance Scheme (NHIS), deduct the contribution for NHIS from the gross income.
8- When all the above have been deducted from the gross income, the balance of income is then charged to Tax.
To tax the balance income, use the following tax table to determine the tax.
First N300,000 @ 7%
Next N300,000 @ 11%
Next N500,000 @ 15%
Next N500,000 @ 19%
Next N1,600,000 @ 21%
Above N3,200,000 @ 24%
NOTE
If after deducting applicable tax relief(s) the balance of income is nil or negative amount, the tax payable by such individual become 1% of the gross income.
EXAMPLE
Let us demonstrate the above with the following example.
Assuming MyFAtutor earns an annual salary amount of =N=738,300 made up of salaries and allowances.
You are also told that he has the following reliefs applicable in his place of work.
i) Pays pension under the new pension scheme
ii) Has a life assurance policy for which he pays =N12,500 annually as premium
Required
Determined his monthly tax liability.
Solution
With the coming into effect of the Personal Income Tax (Amendment) Act of 2011, the graduated rates and reliefs have been streamlined; thus, to implement the 2011 Tax law, the following should be done.
1- Determine the gross income of your employees.
2- Subtract N200.000 (or 1% of the gross income, whichever is higher) from the gross income
3- Find 20% of the gross income and also deduct this from the gross income.
4- Deduct 8% of the gross income as pension deduction (excepting the salary is structured in a way that you can determine basic salary, rent and housing allowances, and then the 8% will be based on the sum of basic salary, rent and housing allowance)
5- Deduct 2% of the basic salary from the gross income as housing fund contribution under the National Housing Fund Act (if the employees are contributing towards housing in line with the National Housing Fund Act.
6- If your employees have life assurance policy, deduct the insurance premium amount from the gross income.
7- If your employees have been enrolled for the National Health Insurance Scheme (NHIS), deduct the contribution for NHIS from the gross income.
8- When all the above have been deducted from the gross income, the balance of income is then charged to Tax.
To tax the balance income, use the following tax table to determine the tax.
First N300,000 @ 7%
Next N300,000 @ 11%
Next N500,000 @ 15%
Next N500,000 @ 19%
Next N1,600,000 @ 21%
Above N3,200,000 @ 24%
NOTE
If after deducting applicable tax relief(s) the balance of income is nil or negative amount, the tax payable by such individual become 1% of the gross income.
EXAMPLE
Let us demonstrate the above with the following example.
Assuming MyFAtutor earns an annual salary amount of =N=738,300 made up of salaries and allowances.
You are also told that he has the following reliefs applicable in his place of work.
i) Pays pension under the new pension scheme
ii) Has a life assurance policy for which he pays =N12,500 annually as premium
Required
Determined his monthly tax liability.
Solution
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