How To Calculate Individual Taxes on Personal Income in Nigeria

Understanding personal income tax in Nigeria is crucial for every working individual. The tax system in Nigeria can seem complex, but it is essential to comprehend. Personal income tax is a tax levied on individuals' income, including salaries, wages, and other earnings. 

Calculating personal income tax involves various income types and specific deductions. Calculating your taxes accurately helps you comply with the country’s legal requirements and avoid penalties. Moreover, it ensures you take advantage of tax reliefs and deductions. 

This article will guide you through calculating various taxes on different forms of income/ personal income in Nigeria within a tax year. With this knowledge, managing your finances becomes more straightforward and transparent.

What is Individual Income Tax?

Individual income tax in Nigeria is a tax levied on individuals' earnings. This tax applies to various types of income, including salaries, wages, bonuses, and benefits. The primary purpose of individual income tax is to generate revenue for the government, which is used to fund public services and infrastructure development.

The Personal Income Tax Act (PITA) governs personal income tax in Nigeria. This law outlines the guidelines for calculating and collecting taxes from individuals. It ensures that every taxpayer contributes a fair share based on their earnings. The tax system is progressive, meaning the tax rate increases with higher income.

Who is an Individual Taxpayer?

An individual taxpayer in Nigeria is anyone who earns income subject to taxation under Nigerian tax laws. This includes employees, self-employed individuals, and professionals. The country classifies an individual as a taxpayer if they earn salaries, wages, bonuses, or benefits within Nigeria.

Individuals who earn income from investments or business activities in Nigeria are also taxpayers. PITA mandates that all residents who earn income must pay personal income tax. Non-residents who derive income from Nigeria are also subject to tax, ensuring a comprehensive tax system.

How is Personal Income Tax Calculated in Nigeria?

Personal income tax in Nigeria is calculated based on an individual's total or worldwide annual income. This includes any income from employment or unemployment sources like salaries, wages, bonuses, benefits, and other earnings. The tax system is progressive, meaning higher income levels are taxed at higher rates. The calculation starts with determining the gross income and applying various deductions and reliefs to arrive at the taxable income.

Types of Individual Income Taxes in Nigeria

Understanding personal income taxation in Nigeria is crucial to ensuring compliance with state laws. This section breaks down the key income types and their tax implications.

Personal Income Tax (PIT)

Personal Income Tax (PIT) is the tax levied on an individual’s total annual earnings. It is calculated after applying all allowable deductions and reliefs, including the CRA and pension contributions. 

Below is a breakdown of the Personal income tax progressive rate in Nigeria:

Consolidated Relief Allowance (CRA)

The Consolidated Relief Allowance (CRA) is a significant component of the Nigerian tax system designed to reduce individual taxpayers' taxable income. It provides financial relief by lowering the amount of income subject to tax. CRA is calculated as the higher of ₦200,000 or 1% of the gross income plus 20% of the gross income.

Click here for a detailed guide to statutory deductions in Nigeria

Types of Individual Income and Their Tax Calculations

Pension Contributions

Pension contributions are amounts set aside from an individual's earnings for retirement savings. These contributions are removed from the gross income before tax is calculated.

Pension contributions reduce the taxable income, thus lowering the overall tax liability. For instance, if an individual contributes 8% of their salary to a pension scheme, this amount is deducted from the gross income, reducing the income subject to tax.

Benefits

Taxable benefits include allowances, company car usage, housing, and other non-cash compensations provided by employers. These benefits are considered part of the total income. The value of the benefits is added to gross income, which is then subject to the same deductions and tax rates as other types of income. 

Bonuses

Bonuses are additional employee payments, often based on performance or company profitability. They are typically paid out at the end of the fiscal year.

Bonuses are added to the gross income and taxed similarly to regular salary. After adding the bonus amount to the annual income, apply for the standard deductions and reliefs before calculating the final tax liability using the graduated tax rates.

13th Month Salary

The 13th month salary is an additional monthly payment given to employees, usually at the end of the year. Many companies use this practice to reward employees.

The 13th-month salary is part of the total annual income and is subject to personal income tax. It is added to the gross income and included in the calculation for deductions and tax rates.

The Difference Between Personal Income Tax and PAYE

PAYE, or Pay As You Earn, collects personal income tax from employees in Nigeria. Under the PAYE system, employers deduct tax from their employees' salaries and wages before paying them. This tax is then remitted directly to the government as the federal income tax on behalf of the employees.

Some Key Differences Between Personal Income Tax and PAYE

1. Collection Method

Personal income tax encompasses all tax paid on an individual's income, including salaries, wages, bonuses, and other earnings. The individual is responsible for ensuring all income is reported and taxed accordingly.

PAYE, on the other hand, specifically refers to the tax deducted by employers from employees' salaries and wages at the source. This system simplifies the tax payment process for employees, as the employer handles the deductions and remittances.

2. Responsibility

For personal income tax, the individual is responsible for filing tax returns and ensuring that all sources of income are reported and taxed.

Under PAYE, the employer is responsible for calculating, deducting, and remitting the tax on behalf of the employee, making it easier for employees to comply with tax regulations.

3. Scope

Personal income tax includes all an individual's income (no exemptions), whether from employment, self-employment, investments, or other sources.

PAYE is limited to employment income, specifically salaries and wages employees earn.

Final Thoughts 

Understanding personal income tax in Nigeria is essential for every working individual. It involves various components such as the Consolidated Relief Allowance, pension contributions, and different types of income like salaries, bonuses, and benefits. 

Calculating your personal income tax accurately helps ensure compliance with Nigerian tax laws, avoiding legal issues and penalties. It also allows you to benefit from tax reliefs and deductions, optimising your tax liabilities.

If you are a business looking to simplify your payroll and tax processes, consider exploring WorkPay's comprehensive HR and payroll solutions. You can also visit our blog for more informative articles and updates on managing your finances and staying compliant with African tax regulations. pwc nigeria, internal revenue service (irs)