How To Calculate Personal Income Tax

In Nigeria, Personal Income Tax (PIT) is primarily governed by the Personal Income Tax Act (PITA) and is administered at both the federal and state levels. The main types of personal income tax include:

1. Pay-As-You-Earn (PAYE): This is the most common form of personal income tax. It applies to individuals who earn salaries or wages, where the employer deducts tax at source and remits it to the relevant tax authority. PAYE tax rate is determined by the progressive tax table below:

First 300,000 @ 7%
Next 300,000 @ 11%
Next 500,000 @15%
Next 500,000 @19%
Next 1,600,000 @21%
Above 3,200,000 @24%

2. Withholding Tax (WHT): It is the specified amount deducted at source from payment accruing or made to Contractors in respect of income receivable for service(s) rendered. WHT tax rate is 5% of the individual's income.

Let's uncover the PAYE deduction for an employee whose monthly gross income is N100k.....

Unlike any other types of tax that you know, PAYE does not have a fixed rate rather it's determined by a progressive tax table.

To subject an income to PAYE, you would have to use the progressive tax table above:

To get the PAYE for an employee monthly gross income of N100k when the only statutory deductions applicable are PAYE & PENSION.

Let's kickoff:
👉Step 1: Convert his monthly Gross pay to Annual (100,000 x 12) = 1,200,000

Employee Pay Breakdown
35% - Basic salary -                  N420,000

20% - Housing allowance -       N240,000

15% - Transport allowance -     N180,000

10% - Meal allowance -            N120,000
10% - Utility allowance -           N120,000
10% - Wardrobe allowance -    N120,000
100% - Annual Gross Pay -    N1,200,000
 
👉Step 2: Compute the pension on his Basic, Housing & Transport allowance

Pensionable Pay = N420,000 + N240,000 + N180,000 = N840,000

Annual Pension = (8% x N840,000) = N67,200.

Monthly Pension = (N67,200 / 12 ) = N5,600

👉Step 3: Compute Gross Income for CRA (which is Annual Gross Income - Pension) N1,200,000 - N67,200 = N1,132,800

👉Step 4: Compute Consolidated Relief Allowance (CRA), which is;
Higher of N200,000 or 1% of Gross income for CRA + 20% of Gross income for CRA.

Fixed Consolidated Relief Allowance = N200,000

Variable Consolidated Relief Allowance = (20% x 1,132,800) = N226,560
Total Consolidated Relief Allowance (CRA) = N426,560.

Total Tax Relief = N426,560 + N67,200 = N493,760

👉Step 5: Compute the Taxable Income which is; Gross Income - CRA (1,200,000 - N426,560) = N706,240.

👉Step 6: Subject the Taxable income to the graduating tax table:
First 300,000 @ 7% = N21,000
Next 300,000 @ 11% = N33,000
Next 106,240 @ 15% = N15,936
Annual PAYE 🟰 N69,936.

👉Step 7: Divide the Annual PAYE by 12 to get the monthly PAYE of N5,828.

👉Step 8: Compute the Monthly Net Pay, which is Monthly Gross Pay - Monthly PAYE - Monthly Pension (100,000 - 5,828 - 5,600) = N88,572.

Finally, the total net pay after deducting Pension & PAYE would be N88,572.

These steps can be easily applied to calculate PAYE and Net Pay for any salary amount, assuming the only deductions involved are Pension and PAYE.

Furthermore, Let's also uncover the WHT deduction for a Contractor whose monthly gross income is N100k.....

👉Step 1: Convert his monthly Gross pay to Annual (100,000 x 12) - 1,200,000

👉Step 2: Subject the Gross income to a Fixed Tax Rate: (5% x N1,200,000) = N60,000

👉Step 3: Divide the Annual WHT by 12 to get the monthly WHT of N5,000.

Finally, the total net pay after deducting WHT would be N95,000.