“I’ve been paying a lot of taxes, and I don’t even understand”
“Is it by force to even pay taxes?”
“I feel cheated when I pay taxes”
Whether you're an employee trying to make sense of your payslip or an employer ensuring accurate payroll deductions, understanding how tax is calculated in Nigeria can be confusing, especially with different deductions like pension contributions, relief allowances, and tax bands.
I have felt this way too. Well, until I stayed in a room with the Customer Support team, who did a great job at explaining taxes. It seems all unfair, but when you read this, you will understand more and even feel relieved.
I’ll break it down step by step in simple terms. Plus, for HR professionals, I’ll show you how PaidHR makes the process easy so you never have to stress about payroll calculations again.
First, what are taxes?
Taxes are compulsory payments made by individuals and businesses to the government. They can be levied on various things, including:
Income: Taxes on personal income, such as salaries and wages
Wealth: Taxes on property, investments, and inheritances
Consumption: Taxes on goods and services, like sales tax or value-added tax (VAT)
Transactions: Taxes on specific transactions, such as taxes on imports(tariffs)
So, everyone pays their taxes one way or the other, but for the sake of this article, we will concentrate on income taxes.
Key Components of Income Tax in Nigeria
Four key elements constitute an employee’s income tax in Nigeria, and they are;
Personal income tax (PIT)
Pay As You Earn (PAYE)
Tax Reliefs and Allowances
Company Income Tax (CIT)
Personal Income Tax (PIT):
This is the tax levied on an individual’s earnings, whether from employment, business, or other sources. It applies to all residents and is regulated by the Personal Income Tax Act (PITA).
Pay As You Earn (PAYE):
This is a system where employers deduct income tax from employees’ salaries before payment and remit it to the government. The amount deducted depends on Nigeria’s progressive tax system, where higher earnings attract higher tax rates. There's a national tax table for different pay bands, so you do not have to worry about the calculation.
Tax Reliefs and Allowances:
These are mandatory deductions that reduce an employee’s taxable income. They include the Consolidated Relief Allowance (CRA), pension contributions, National Housing Fund (NHF), National Health Insurance Scheme (NHIS) and other statutory deductions.
It is important to note that NHF is not compulsory for private employees, and instead of the NHIS, private employees use what is known as Health Maintenance Organisation (HMO), which may or may not be among the statutory deductions, as this is left to the employer’s discretion.
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Company Income Tax (CIT):
While this is a tax on company profits, it indirectly affects employees since businesses must comply with tax regulations, which influence salary structures and benefits. However, CIT is paid by the company, not the employee.
Before we explore tax computation in Nigeria, here are some statements to take note of based on the tax reform bill which was proposed by President Bola Ahmed Tinubu on the 3rd October, 2024 for individuals and small businesses:
- Businesses with an annual turnover of ₦50 million or less are exempt from income tax.
- Small businesses will not have withholding tax deducted on their business income and are exempted from tax deductions on vendor payments.
- Companies' income tax will reduce from 30% to 27.5% in 2025 and 25% in subsequent years.
- Workers earning ₦800,000 or less annually will be exempted from income tax, benefiting most Nigerians.
- Food, education, and healthcare will have 0% VAT, while rent, public transport, and renewable energy will also be exempted.
- Businesses can claim tax credits on VAT paid for assets and production expenses, reducing production costs by up to 7.5%.
- Tax exemptions for profits of co-operatives, charities, educational and religious organizations, trade unions, and government entities if not from business activities.
- Compensation for job losses up to ₦50 million will be tax-exempt.
Another worthy statement to note is that, according to the Federal Inland Revenue Service (FIRS), before you can pay your taxes, you must have a Taxpayer Identification Number (TIN) to pay taxes. Here are the steps to get your TIN to ensure tax compliance in Nigeria.
How to do tax calculation in Nigeria
Let's do a breakdown on the computation of taxes in Nigeria so you can try it on your own if you'd like to:
Step 1: Determine Your Gross Income
Your gross income is your total salary before any deductions. This includes your basic salary, housing, transport, and other allowances. Think of it as your earnings before the government and pension fund take their share.
For example, if you earn ₦500,000 per month, that’s your gross income. On the other hand, your net income (also called take-home pay) is what’s left after all deductions have been made—including taxes, pension contributions, and other statutory payments. This is the actual amount that lands in your bank account.
Step 2: Deduct Pension Contributions (8% of Gross Income)
The first deduction is for your pension, which is 8% of your gross income. This goes to your retirement savings and is legally required by the government. Think of it as investing in your future. Nobody wants to work until they are old and frail.
Using our example:
- 8% of ₦500,000 = ₦40,000
- After deducting pension, your remaining amount for tax calculation is ₦460,000.
The good news? Your employer also contributes 10% to your pension, but that doesn’t affect your take-home pay. It’s just extra savings for your future self.
Step 3: Apply Consolidated Relief Allowance (CRA)
The CRA is a tax relief (explained above) that reduces your taxable income. Understanding this part can feel a little tricky but it comes in two parts:
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CRA1: Fixed or 1% of Gross Income (Whichever is Higher)
- The government allows you a tax-free amount of either ₦200,000 or 1% of your gross income, whichever is higher.
Example: 1% of ₦500,000 = ₦5,000, which is lower than ₦200,000, so you get the fixed ₦200,000 relief.
CRA2: 20% of Gross Income minus pension
- Another tax relief is given for statutory deductions set at 20% of your gross income and the deducted pension.
-₦500,000 - ₦40,000 = ₦460,000
20% of ₦460,000 = ₦92,000
Total CRA Calculation
- CRA1 + CRA2 = ₦200,000 + ₦92,000 = ₦292,000
This means ₦292,000 of your income is tax-free, reducing the amount you need to pay tax on.
Step 4: Determine the Tax-Exempt Amount:
The tax-exempt amount is the sum of:
- Total CRA (₦292,000)
- Pension contribution (₦40,000)
So, the tax-exempt amount is ₦332,000.
Step 5: Determine Taxable Income
Your taxable income is your gross income minus your total CRA and pension contributions.
- ₦500,000 - ₦332,000 = ₦168,000.
This means tax will only be calculated on ₦168,000, not your full salary.
Step 6: Apply the Progressive Tax Bands
Nigeria uses a progressive tax system, meaning different portions of your income are taxed at different rates, so this is the monthly PAYE tax calculator in Nigeria:
Since our taxable income is ₦168,000, it falls entirely within the first ₦300,000 bracket at 7%.
- 7% of ₦168,000 = ₦11,760.
That’s the total PAYE tax you’ll pay for the month! If you are wondering about the due date for remitting PAYE monthly in Nigeria, it is on or before the 10th day to the State Board of Internal Revenue (SIRS), which is simply the state you reside in.
Step 7: Sum Up the Total Tax
After applying the tax bands, we arrive at ₦11,760 as the total tax payable for the month.
If you were earning more, the tax would be calculated progressively across the brackets. This means your net salary after statutory remittances and pension is ₦448,240. See? Still, there's still a lot to take home.
How Does PaidHR Automate Tax Calculation in Nigeria
Now, imagine doing this for every employee, every month, manually. It’s time-consuming, prone to errors, and stressful.
That’s where PaidHR comes in. It:
- Automatically calculates taxes based on Nigerian tax laws keeping you compliant effortlessly.
- Deducts pension, NHF, and other statutory contributions automatically.
- Generates payslips with clear breakdowns.
- Helps businesses stay compliant with FIRS and state tax regulations.
With PaidHR, you eliminate errors, save time, and ensure accurate payroll processing every time. You can read more about payroll processing in Nigeria, and if your employees are in different states of the country, this guide will help you.
Tax compliance with PaidHR
Understanding tax deductions is crucial, but you don’t have to stress over calculations every month. Whether you’re an employer managing multiple salaries or an employee curious about your take-home pay, PaidHR ensures accuracy and compliance without the headache.
Want to simplify tax calculations? Let PaidHR handle it for you. Request a demo.