Personal Income Tax is the charge on the income of individuals, trustees, and executors. In Nigeria, the two key legislations are the Personal Income Tax Amendment Act 2011 (PITAM) and Finance Act 2020. The effective date of the Finance Act 2020 is 1 January 2021. This article provides a guide on the taxation of employees (PAYE tax) in Nigeria.
Employees pay tax based on residency. Residency rule is used to know the place where a taxpayer should pay tax at the end of a period or year. Thus, an employee will be a tax resident in Nigeria if the;
- employee works fully (or partially) in Nigeria or
- employer is in Nigeria or
- employer has a fixed base in Nigeria.
There is a different basis for determining whether an expatriate employee is resident in Nigeria. Hence, an expatriate employee may be liable to tax in Nigeria unless the;
- employee stayed less than 183 days in any period of 12-months;
- employer is not resident in Nigeria;
- non-resident employer bears the employee cost; and
- employee has paid tax in another country.
Significant economic presence for individuals
Notwithstanding the four conditions for taxation of foreign employees in Nigeria, the Finance Act (FA) 2020 introduced the significant economic presence rule for personal income tax (PIT). The gains or profits of the trade or business will be taxable in Nigeria when an individual, executor, or trustee outside Nigeria provides technical, management, consultancy, or professional services to a person resident in Nigeria or a fixed base or agent of a foreign entity in Nigeria.
The withholding tax (WHT) will be the final tax where this is the only source of income for an NRC without SEP. Currently, the WHT rate for this type of transaction is ten percent (10%). As SEP considers cross border activities, a non-resident person (NRP) may seek tax relief under a double tax treaty.
Transactions exempt from SEP are employment income, receipts from and payments to an educational institution, and sums paid by a foreign-fixed base of a Nigerian company.
Chargeable income
Once an employee is a tax-resident in Nigeria, income tax will be payable on the worldwide income. Worldwide income refers to income received within and outside Nigeria. Meanwhile, income chargeable to PIT includes income from all sources minus all non-taxable income, income on which no further tax is payable, tax-exempt items, allowable business expenses, and capital allowance. In other words, the gross income of an employee who earns only emoluments will be as follows;
- Employment income less non-taxable income, income on which no further tax is payable, and tax-exempt items.
The statutory tax allowances and reliefs are:
- Premium paid in the prior year for a life insurance policy of a person or a spouse.
- Contribution(s) to an approved pension fund, National Health Insurance Scheme, National Housing Fund
- Gratuities
- Consolidated relief allowance or CRA; that is the higher of NGN200,000 per annum or 1% of annual gross income, plus 20% of the gross income per annum. Note that the new definition of gross income is gross emoluments minus all statutory reliefs.
Tax rates
Nigeria adopts a Pay-As-You-Earn (PAYE) system to calculate the personal income tax of employees. It is called PAYE tax. This tax rate progresses from seven percent (7%) to twenty-four percent (24%) of taxable income. The taxable income band ranges from NGN300,000 to above NGN3.2 million in a year.
Assuming the annual taxable income of an employee is five million naira (NGN5,000,000), the annual PAYE tax will be NGN992,000. That is, NGN (21,000 + 33,000 + 75,000 + 95,000 + 336,000 + 432,000).
| Annual taxable income (NGN) | Rate | Tax payable per annum (NGN) |
|---|---|---|
| First NGN300,00 | 7% | 21,000 |
| Next NGN300,000 | 11% | 33,000 |
| Next NGN500,000 | 15% | 75,000 |
| Next NGN500,000 | 19% | 95,000 |
| Next NGN1,600,000 | 21% | 336,000 |
| 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. |
Tax returns and due date
Furthermore, an employer will deduct monthly PAYE tax from employees’ salary and remit the tax to the relevant tax authority through designated banks. The due date is within ten (10) days of the next month.
There are two annual PAYE tax returns that an employer should file on behalf of an employee. They are Form H1 and Form A. Another name for the Form H1 return is an annual employer’s tax return. It shows the name, gross income per annum, and PAYE taxes of employees in the preceding tax year. Form H1 contains the monthly payroll tax returns and any adjustments. In practice, a taxpayer files Form G alongside Form H1.
Form G shows details of the annual PAYE tax paid and the corresponding receipts. The due date for filing Form H1 is 31 January of the following year.
On the other hand, Form A is an annual declaration of individual income and claims for allowances and reliefs form. Details of the individual income includes non-employment income, domestic staff, and accommodation. Thus, the employee has an active role in providing the information required to complete the Form A. 31 March of the current year is the due date for filing Form A.