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Calculating Personal Income Tax (PIT)

 

PIT Rate

PIT rate is applied on a graduated scale and taxable income bands as set out below:

Tax Band Tax Rate
First N300,000 7
Next N300,000 11
Next N500,000 15
Next N500,000 19
Next N1.6m 21
Above N3.2m 24

 

How is PIT Computed

Let us consider a practical demonstration on PIT computation for Mr Jimoh who earns a gross salary of N5,000,000 per annum:

In this demonstration, we assume that the only tax allowances due to Mr Jimoh are consolidated relief allowance (CRA) plus 20% of earned income and pension contribution. In line with the PIT Act, the consolidated relief allowance is the higher of N200,000 and 1% of gross income. Obviously, N200,000 is higher than 1% of gross income of N50,000 (1%*5,000,000) and is therefore selected.

Remember, we have to add 20% of earned income which is N1,000,000 (20%*5,000,000). Employee pension at 8% of gross income is N400,000. Therefore, Mr Jimoh’s total tax allowance is N1,600,000, that is (N200,000+N1,000,000+N400,000). This means that Mr Jimoh’s taxable income is N3,400,000, that is (N5,000,000-N1,600,000).

To calculate tax payable by Mr Jimoh, we shall apply the graduated tax rates and taxable income bands explained earlier as follows:

First N300,000 7%                          21,000
Next N300,000 11%                          33,000
Next N500,000 15%                          75,000
Next N500,000 19%                          95,000
Next N1,600,000 21%                       336,000
Above N3,200,000 24%                          48,000
Total tax payable (C)                         608,000

 

Note that the portion of Mr Jimoh’s taxable income above N3.2m is N200,000. This is taxed at 24% with tax amount of N48,000. Therefore, the total tax payable by Mr Jimoh is N608,000. This means that his net pay for this year is N4,392,000, that is (N5,000,000-N608,000).

Minimum Tax

Every taxable person is liable to a minimum income tax of 1% of their gross income, except those earning the approved national minimum wage or below. This is applicable where actual tax payable after all reliefs and allowances is less than 1% of gross income.

Tax exempt items

Tax exempt items for PIT purpose include Pension Contribution; National Housing Fund; National Health Insurance Scheme; Life Assurance Premium and Gratuity.

Filing Requirements

  • Individuals such as self-employed persons; high net worth and those on direct assessment are to file annual PAYE returns relating to preceding year not later than 31 March every year.
  • Employers are required to file annual PAYE returns on behalf of their employees not later than 31st January every year.

Due Date for Payment

The tax deducted from employees’ income are to be remitted on or before the 10th day of the month following the payment of salary.

Penalties for Failure to Remit or File Returns

  • 10% per annum of the amount plus interest at the prevailing market lending rate, usually between 15% to 21%.
  • Failure to file annual employee tax returns and individual self-assessed tax returns attracts N500,000 and N50,000 respectively upon conviction.

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