Understanding PAYE in Nigeria
PAYE is a method of collecting income tax from employees directly through their employers. The tax is deducted monthly based on the employee’s earnings and remitted to the relevant tax authority (usually the State Internal Revenue Service). The PAYE system is governed by the Personal Income Tax Act (PITA), 2011 (as amended), which outlines the rules for calculating and deducting taxes.Key components of PAYE
- Taxable Income: This includes your basic salary, allowances, bonuses, and other benefits.
- Tax Reliefs and Allowances: Certain allowances, like consolidated relief allowances (CRA), are tax-free. Also, certain contributions/expenses are considered tax-free.
- Tax Bands: Nigeria uses a progressive tax system, meaning the more you earn, the higher your tax rate.
Common PAYE Deduction Errors
Here are some common mistakes that could lead to over-taxation:- Incorrect Taxable Income Calculation Employers may include non-taxable income (e.g., reimbursement made due to company’s expenses made from personal account) in your taxable income, leading to higher PAYE tax deductions
- Miscalculation of Consolidated Relief Allowance (CRA)
The CRA is a tax-free allowance granted to all employees. It includes:
- 20% of gross income plus
- N200,000 or 1% of gross income (whichever is higher). If your employer fails to apply this correctly, your taxable income will be overstated.
- Exclusion of Tax-Deductible Expenses
Certain contributions/expenses are deductible for tax purposes. They include:
- Pension contribution
- Contribution to the National Housing Fund
- Interest on mortgage loan
- Life assurance premium
- Wrong Application of Tax Bands Nigeria’s tax bands are progressive, with rates ranging from 7% to 24%. If your employer applies the wrong band, your tax deductions could be higher than necessary.
How to Spot PAYE Errors
- Review Your Payslip Check your gross income, taxable income, and net pay. Ensure that non-taxable allowances and tax-deductible expenses are excluded and that the CRA is applied correctly.
- Verify Your Tax Bands
Use the current tax bands to confirm that your employer is applying the correct rate.
The bands are calculated as follows on an annual basis:
- First N300,000: 7%
- Next N300,000: 11%
- Next N500,000: 15%
- Next N500,000: 19%
- Next N1,600,000: 21%
- Above N3,200,000: 24%
- Compare with Previous Payslips Look for sudden increases in tax deductions without a corresponding increase in income.
- Confirm Pension and NHF Deductions
Ensure that your pension (8% of basic, housing, and transport) and NHF (2.5% of monthly income) contributions are correctly deducted before tax calculation.
NOTE: The NHF contribution is required but not obligatory for private sector employees but compulsory for public sector workers.
- Use a PAYE Calculator
Stransact’s PAYE Calculator simplifies this process. Input your gross earnings and deductions to verify whether your employer is correctly computing your PAYE tax.
Visit: stransact.com/paye-calculator
Steps to Resolve PAYE Discrepancies
- Discuss with Your Employer Politely bring the issue to your employer’s attention. Provide evidence (e.g., payslips, tax calculations) to support your claim.
- Contact Your State Internal Revenue Service (SIRS) If your employer doesn’t resolve the issue, reach out to your State Internal Revenue Service. They can investigate and ensure compliance with tax laws.
- Seek Professional Help Tax consultants, like Stransact, can help you review your payslips, identify errors, and liaise with your employer or tax authorities on your behalf.
How Stransact’s PAYE Calculator Can Help
At Stransact, we understand how complex PAYE calculations can be. We developed a PAYE calculator to help employees and employers ensure accuracy. Here’s how it can help you:- Quick Calculations: Instantly compute your net pay based on your gross income, allowances, and deductions.
- Error Detection: Identify discrepancies in your tax deductions by comparing your payslip with the calculator’s results.
- Compliance Assurance: Ensure your employer is applying the correct tax bands and reliefs.
Conclusion
PAYE errors can cost you thousands of naira yearly if left unchecked. By taking proactive steps to verify deductions, leveraging available tax reliefs, and seeking expert assistance when needed, you can ensure your salary reflects what you truly deserve.Stay tax-smart! Double-check your deductions with Stransact’s PAYE calculator today.
