Having spent a considerable amount of time working with companies (big and small), there is one thing that is always consistent; TAX ISSUES. HR managers always find it either too difficult or too tasking to calculate the most accurate amount to withhold from their staff salaries.
For example, in some organizations, they choose to withhold a specific percentage on a monthly basis and when they do get audited by the Federal Inland Revenue Service (FIRS) or their state counterparts, the pray, bribe or beg their way to have a reduced charge to be paid to the government. It doesn’t have to be so.
Let us first understand the Nigerian employee tax law.
Highlights of the new law include:
1. Total Relief – N200,000.00 or 1% of gross Income whichever is higher
2. 20% of Gross Income included
3. Minimum tax is 1% of Gross pay.
The following deductions are not Taxable (Tax Exempts):
1. Pension deductions
2. National Housing Fund deductions
3. Life Assurance Payments
4. National health Insurance scheme
So what does this all mean? First of all, to calculate tax, the salary must be annualized (this means, if staff is paid monthly, you multiply by 12, if twice in a month, then multiply the gross salary by 24.) So lets say staff John Abu is paid 100,000 Naira on a monthly basis, then you will calculate his annualized gross by 100,000 * 12 = 1,200,000.
Now lets go to the next step.
You see, the trick to getting the right tax amount is following the calculations step by step. So here we go
1. Ensure the staff salary you are dealing with is already annualized as discussed above
2. Check for the higher allowance to use. The default 200,000 Naira or 20% of gross income
3. Calculate total allowances which is a summation of result in item 2 and other allowances like Pension deductions, Housing , Life Assurance etc
4. Evaluate which total allowance to use, the total in item 3 or 1%(one percent) of item 1. The higher total allowance will be used.
5. Subtract the final value of item 4 from item 1
6. The result from item 5 will now go through a step approach. Let me explain further
6a. First 300,000 from item 6 will be subjected to 7% . In other words, 7% of 300,000
6b. Second 300,000 will be taxed at 11%. Up to 600,000 Naira
6c. Third 500,000 will be taxed at 15%. Up to 1,100,000 Naira
6d. Fourth 500,000 will be taxed at 19%. Up to 1,600,000 Naira
6e. Fifth 1,600,000 will be taxed at 21%. Up to 3,200,000 Naira
6f. Any other amount over 3,200,000 is taxed at 24%
In other words, lets say a staff makes an annualized taxable income (Taxable Income is the income remaining after pension and other deductibles have been removed) of 3,000,000 (Three Million Naira), then the calculation will be as follows
(7% of 300,000) + (11% of 300,000) +15% of (500,000)+(19% of 500,000)+(21% of 1,400,000)
21,000 + 33,000 + 75,000 + 95,000 + 294,000
Total = 518,000
Oh, Oh, don’t be scared. You aren’t paying 518k in taxes.. Remember this is annualized. So the last thing you do is divide by 12 for monthly payments or by the number of payment periods you have in your company.
Lets stop here for today….We will go deeper in the future.
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