THE PRINCIPLES OF PAY AS YOU EARN

PERSONAL INCOME TAX IN NIGERIA

THE PRINCIPLES OF PAY AS YOU EARN (PAYE)

With the proposed 2016 budget of the Federal Republic of Nigeria and those of the State governments in Nigeria, it has been established that internally generated revenue is the major source of finance for budgets and not Oil as the case used to be. Talking about this tax-returns-hmrcnew bride called internally generated revenue, taxation is its nucleus. It is a pity that an average Nigerian lacks the shallow not to talk about the in depth knowledge of principles of taxation in Nigeria.

In view of this, it is expected that the governments will want to bring more Nigerians into the tax net as over 40% of the gainfully employed residents in Lagos for example evade tax. As at today, the Lagos State Government is executing her plans to ensure more Lagos residents are dragged into the tax net. Recently, Lagos State established a Rapid Tax Prosecution Unit which will harass and threaten tax evaders. As a result of this, the issues of taxation cannot be over flogged in Nigeria especially during this period.It has been discovered that majority are not aware of the process of computations required to ascertain the PAYE chargeable on salaries to be paid based on self-assessment.

What is PAY AS YOU EARN?

PAYE is the tax imposed on the income of employees, deducted at source and remitted to the relevant tax authorities by the employer. The self -employed, sole proprietors, owners of business ventures and partners in a partnership, as the case may be, are also expected to pay PAYE on the incomes earned by them and remit same to the relevant tax authorities. It is administered by the Personal Income Tax (Amendment) Act 2011.

Features of PAYE

It is expected by the law that all employers, as government agents, in Nigeria to compute PAYE on the salaries of their employees, deduct the computed PAYE at source and also remit same to the relevant tax authorities on a monthly basis. The PAYE of all the gainfully employed residents of each State in Nigeria must be remitted to the Internal Revenue Service of that State in which they work on or before the 10th working day following the month when salary was paid. If you work in Lagos for example in January 2016, your PAYE must be remitted to the Lagos State Board of Internal Revenue Service (LIRS) on or before February 10, 2016. Where the February 10, 2016 fell on a Saturday/Sunday, PAYE must be remitted latest by the Friday preceding the weekend.

Penalties for the failure to remit PAYE

Where an employer refuses or neglects to operate the pay as you earn scheme, such an employer would be liable. Penalties may be imposed for:

  • Failure to deduct the correct tax from employee’s income
  • Failure to pay tax deducted from employees pay
  • Failure to make correct returns of the employees.

Where an employer refuses or neglects to deduct or remit PAYE deducted, a penalty of 10% per annum is imposed. In addition, interest is charged at the ruling commercial interest rate.

Basis of Assessment

PAYE is assessed to tax on actual year basis. This means that the income earned in the year 2015 should be assessed in same period.

Computation of PAYE

3-payeThe first step is to establish the total emoluments/gross salaries of individuals. Kindly note that where any employee had enjoyed the use of an asset owned by the employer e.g. a car or lived in a rented apartment paid for by the employer, such reward is described by the law as “Benefit In Kind”. These are treated as explained below:

 

  • For the assets owned by the employer: Examples of these could be a car and a house. Where this is the case, 5% of the market value of the asset should be added up to the total emolument of the employee. For a car with N5 million value only N250, 000 will be added back to the annual salary of the beneficiary as taxable.
  • In the case of a rented asset: For example, a rented apartment for the employee but paid for by the employer, the total amount paid per annum by the employer will be added up to the annual salary of the employee.
  • Where support staff has been provided: When a driver, cook or a gardener has been provided and paid by the employer for the use of the employee, the amount/wage paid to the support staff will be added to the salary of the employee.

Subsequent to the determination of the total emolument, the following are the allowable deductions by the law from the total emolument of each employee to arrive at taxable income:

  • Consolidated Relief Allowance: This is the higher of
  • 20% of the total emolument plus N200,000 or
  • 1% of gross earnings
  • Pension contribution: This is the employee contribution of 8% in line with the Pension Reform Act 2014
  • National Housing Fund contribution
  • National Health Insurance Scheme contribution
  • Life Assurance Premium contribution

After the taxable income had been ascertained, the following graduated rates are applied on the taxable income to calculate the tax payable:

  • First N300,000 at 7%
  • Next N300,000 at 11%
  • Next N500,000 at 15%
  • Next N500,000 at 19%
  • next N1,600,000 at 21%
  • above N3,200,000 at 24%

Employees are expected to be paid after pension and PAYE has been deducted at source by the employers. Kindly note that where any of the allowable deductions stated above other than pension had been applied to arrive at the net pay, it is imperative that such deductions are paid to the relevant statutory bodies and evidences of the remittances are obtained by the employer. If the employer fails to obtain these evidences then the tax authority has the power to disallow such deductions in the computation of PAYE. The PAYE computation described above is for a whole year and this is divided by 12 and applied monthly.

Residency Rule

An individual is considered resident in Nigeria throughout the year of assessment if he:

  • is domiciled in Nigeria;
  • sojourns in Nigeria for a period or periods in all amounting to 183 days or more in a 12 month period;
  • serves as a diplomat or diplomatic agent of Nigeria in a country other than Nigeria (FIRS, 1993, P.1)

When the residence of a tax payer has been determined the total income of the individual is assessable by the tax authority in whose territory the taxpayer is deemed to reside irrespective of the territory from which each income is derived.

Annual Returns

It is expected by the law that all employers file annual returns of PAYE paid in a particular year for all employees latest by the 31 January following that year. That is, for all the PAYE deductions in 2015, annual returns must be filed by 31 January, 2016. Failure to do this will attract a penalty of N500, 000

Conclusion

At this juncture, it is imperative that companies are not caught at the other side of the law especially when jail terms are calling for offenders. The time for the correct computation is now. For further clarifications on the matters surrounding PAYE, you could talk to a tax consultant.

Theophilus Olufemi is a tax consultant with TAC Professional services

For more information, discussion and questions kindly contact Theophilus Olufemi on:
Tel: +234 8096257081
theophilus@tacgroupng.com

Disclaimer: This piece of information above represents our views to enlighten the entire public on the principles of PAYE. This does not represent any tax advice in any way and TAC Professional Services will not be held liable for the use of this information.

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