PAYE (Pay-As-You-Earn) is a tax system in Nigeria that requires employers to deduct income tax from their employee's salaries or wages and remit it to the relevant tax authority on their behalf.
Here's an overview of PAYE in Nigeria:
Purpose of PAYE:
PAYE is designed to ensure that individuals pay their income tax throughout the year as they earn income, rather than having to pay a lump sum at the end of the year. It simplifies tax collection and encourages compliance.
Who is Responsible:
Employers are responsible for deducting and remitting the appropriate amount of income tax from their employee's salaries or wages. They act as tax agents for their employees.
Tax Authorities:
The State Internal Revenue authority is legally authorized to gather income taxes from individuals, except for the following cases, where taxation falls under the jurisdiction of the Federal Inland Revenue Service:
Individuals employed in the Nigerian Army, Navy, Air Force, and Police Force, except in civilian roles, as well as officers of the Nigerian Foreign Service.
All residents of the Federal Capital Territory.
Non-residents of Nigeria who earn income or profit from within Nigeria.
Calculating PAYE:
The calculation of PAYE involves considering an employee's gross salary and applying the relevant tax rates and allowances. Tax rates are progressive, meaning that higher income levels are taxed at higher rates. There are also specific tax-free allowances that can be deducted from the gross salary.
Certain categories of income or individuals may qualify for exemptions, reliefs, or reduced tax rates. These can include contributions to pension funds and interest on mortgages.
Tax Bands and Rates:
Nigeria's tax system has various tax bands with corresponding tax rates. The tax rates increase as the employee's income increases. There are also different tax rates for residents and non-residents.
The table below shows a summary of the taxable income tax bands and applicable rates of tax on an annual basis.
If a taxpayer's taxable income is reduced due to personal reliefs and allowances, or if the total income results in a tax amount lower than the minimum tax, they are required to pay a minimum tax of 1% of their total income.
Taxable Income:
Taxable income includes the employee's basic salary, allowances, bonuses, and other benefits. Non-taxable items, such as retirement contributions and certain allowances, may be excluded.
Monthly Deductions:
Employers deduct the calculated income tax from employees' salaries monthly and remit it to the tax authority. The deduction is made before the salary is paid to the employee.
Filing and Reporting:
Employers are required to file tax returns and reports with the tax authority, indicating the amount of tax deducted from each employee. This ensures transparency and accountability.
PAYE must be remitted on or before the 10th day of the subsequent month after salary payment. For instance, the PAYE tax deducted from January's salary should be remitted by the 10th of February.
Regarding individuals under direct assessment, payment must be submitted along with returns within 90 days of the fiscal year, which means no later than March 31st.
Employee Identification:
Employees are usually issued a Tax Identification Number (TIN), which is used for tax identification and tracking of their tax payments.
Compliance and Penalties:
Both employers and employees are expected to comply with PAYE regulations. Failure to deduct or remit the correct amount of tax can result in penalties.
An annual charge of 10% on the principal amount, along with annual interest based on the prevailing bank lending rate (typically a one-time interest rate of 15% to 21% is used).
Failure to file on time results in a penalty of ₦500,000 for corporate entities and ₦50,000 for individuals.
Updates and Changes:
It's important to stay informed about changes in tax regulations, rates, and allowances, as they can impact the amount of tax deducted.
In summary, PAYE is a fundamental part of Nigeria's tax system, and employers have a legal obligation to accurately calculate and deduct income tax from their employees' salaries. Employees should be aware of their rights, responsibilities, and potential tax reliefs to ensure proper compliance with the PAYE system.
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