A Detailed Guide to Statutory Deductions in Nigeria

Statutory deductions are legally mandated contributions required from both employers and employees to support government programs and social welfare. Timely remittance of these deductions is crucial, as non-compliance can lead to hefty fines and legal consequences. While these deductions reduce employees' gross income, they play a vital role in securing benefits like pensions, healthcare, and housing. Employers, on the other hand, bear the responsibility of deducting and remitting the correct amounts to the relevant authorities before salary payment, ensuring adherence to regulatory requirements and fostering a compliant workplace.

What are Statutory Deductions?

Statutory deductions in Nigeria are mandatory deductions from employees' salaries or wages as required by law. These deductions are needed for funding specific government programs, social security, and other statutory obligations.

Statutory deductions in Nigeria serve several important purposes for both employees and the government. They include:

• Revenue Generation for Government: Statutory deductions contribute to the government's revenue. These funds are essential for financing public services, infrastructure and economic development, and various government programs.
• Social Security and Welfare: Deductions like pension contributions contribute to employees' social security and welfare. These funds provide financial security, affordable housing, and healthcare benefits to workers.
• Workplace Safety and Employee Compensation: The Employee Compensation Act Fund ensures that there is a mechanism that compensates workers who suffer from work-related injuries or death. This promotes workplace safety and protects the financial well-being of workers.
• Legal Compliance and Accountability: Statutory deductions ensure that employers comply with relevant laws and regulations. They create a system of accountability, preventing tax evasion and other forms of non-compliance.

Statutory Deductions in Nigeria

Employees who fulfill statutory obligations in Nigeria are eligible for a reduction in their gross income when calculating the Consolidated Relief Allowance. Statutory deductions in Nigeria include;

• National Housing Fund (NHF)
• National Health Insurance Scheme (NHIS)
• Personal Income Tax (PIT)
• Pension Fund
• Withholding Tax
• Industrial Training Fund (ITF)
• Nigeria Social Insurance Trust Fund (NSITF)

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1. National Housing Fund (NHF)

The NHF was initially established by Act 3 of the 1992 NHF Act. The fund aims to provide Nigerians loans for renovating, developing, or buying houses. Regular contributors can get long-term loans from mortgage institutions.

All Nigerian employees may access the NHF scheme if they are 21 and earn a minimum of NGN3,000 annually. Employers must register employees with NHF and contribute 2.5% of their basic salary.

Employees must remit the entire amount in one month after the payday. Late remittance after the due date attracts a penalty of NGN50,000.

2. National Health Insurance Scheme (NHIS)

The NHIS is another deduction in Nigeria. Its purpose is to provide affordable healthcare and medical attention for all Nigerians. Employers with at least 10 employees should register their workers and contribute the amount each month.

Employers must contribute 10% of the basic monthly salary and deduct 5% of the employee's salary towards this fund. The health fund covers the employee’s spouse and four biological children under 18. If the employee has more than 6 family members, they may register the additional people as dependents.

3. Personal Income Tax (PIT)

Personal Income Tax is levied on the income of individuals, trustees, and executors under the Personal Income Tax Amendment Act 2011 and the Finance Act 2020. Employees are taxed based on their residency/residency status and must pay taxes to the state of their residence. Personal income tax is calculated by subtracting statutory reliefs from the gross income, not net income. Click here to see a detailed breakdown of personal income tax in Nigeria

The PAYE tax rates range from 7% to 24% of taxable income, with a minimum tax of 1% of gross income. Low-income earners, defined as those earning the National Minimum Wage or less (₦30,000 per month or ₦360,000 per annum), are exempt from this minimum tax. Employers must remit monthly PAYE taxes within ten days of the following month or face penalties.

4. Pension Fund

The Pension Fund is a structured social protection initiative covering all employees within a company. In Nigeria, employee pensions are regulated by the 2004 Pension Reform.

Under the Pension Reform Act, the worker and employer contribute a minimum of 10% and 8% of the employee’s monthly compensation, respectively. Alternatively, an employer may make the whole contribution on behalf of the employee. In this case, the minimum should be 20% of the employee’s monthly pay.

Employees should open a retirement savings account with an approved Pension Fund Administrator, to which the employers remit the deductions. The deadline for paying the funds is seven working days after payday. Lack of compliance leads to a 2% penalty of the unpaid amount.

5. Withholding Tax

Withholding tax in Nigeria is an income tax deducted at the source by the employer from payments made to consultants, contractors, and on interest, dividends, and royalties. The rate is 5%. The deducted tax must be remitted to the State Board of Internal Revenue for individuals within 10 days after the end of the transaction month. Compliance is mandatory for withholding tax, with penalties for non-compliance including fines and imprisonment.

6. Industrial Training Fund (ITF)

The Industrial Training Fund (ITF) operates as a government parastatal within the Federal Government of Nigeria, falling under the Ministry of Industry, Trade, and Investment jurisdiction. The agency aims to promote and stimulate skills development in the industrial and commercial sectors.

The Industrial Training Fund (ITF) applies to employers with a minimum of 5 employees and an annual turnover of NGN50 Million. These employers must contribute 1% of their annual payroll to the ITF.

By providing appropriate documentation as evidence of this contribution, an employer becomes eligible for a refund, receiving 50% of the amount contributed.

7. Nigeria Social Insurance Trust Fund (NSITF)

The Nigerian Social Insurance Trust Fund (NSITF) applies to all employers and employees across public and private sectors. Members of the Armed Forces are exempt from the scheme.

As part of their obligations, employers must contribute 1% of their employees' monthly payroll to the NSITF. This contribution ensures that a compensation fund is in place to support workers or their dependents in the unfortunate event of work-related incidents or health issues.

Note that this deduction is not from an employee’s salary. Rather, it is a statutory contribution by an employer. The deadline for the contribution is before the 16th day of the succeeding month after payday. Failure to contribute attracts a penalty of 10% of the unremitted amount.

Penalties for Non-Remittance of Statutory Deductions in Nigeria

Failure to remit statutory deductions in Nigeria comes with significant legal and financial consequences. Employers who neglect their obligations face penalties, which vary depending on the type of deduction:

• National Housing Fund (NHF): Late remittance attracts a fine of ₦50,000.
• National Health Insurance Scheme (NHIS): Non-compliance can lead to legal action and regulatory sanctions.
• Pensions: Employers face a penalty of 2% of the unpaid contribution for each month of default.
• PAYE Tax: Late payments incur penalties and interest, including possible prosecution for tax evasion.
• Withholding Tax: Non-remittance may lead to fines, imprisonment, or both.
• Industrial Training Fund (ITF): Employers lose the right to claim a 50% refund of contributions.
• NSITF: A 10% penalty is applied to unremitted amounts after the deadline.

These penalties not only impose financial burdens on businesses but can also tarnish their reputation and credibility. To avoid such setbacks, prompt remittance is essential. Business owners using third parties, such as payroll providers and solutions, must ensure that contributions are accurately and timely remitted to the appropriate authorities to prevent any compliance issues.

With Workpay, you can rest assured that all your statutory contributions are handled efficiently and submitted on time, ensuring full compliance with regulatory requirements. Take the stress out of statutory deductions—switch to Workpay today!

A Blueprint for Sustained Growth

Understanding and complying with Nigeria's statutory deductions is more than a legal obligation—it’s an investment in employee welfare and business sustainability. By ensuring timely remittance, businesses contribute to a thriving economy while fostering trust and compliance. Partner with Workpay to streamline your deductions and drive lasting growth.

Frequently Asked Questions

What can I do if my payroll provider is not remitting my statutory contributions?

Immediately report the issue to the relevant authorities, such as the Pension Commission (PenCom) or tax authorities. Consider switching to a compliant payroll provider like Workpay and ensure you regularly verify remittance receipts to avoid penalties and protect your employees’ benefits.

What is the statutory pension contribution in Nigeria?

The statutory pension contribution in Nigeria requires a minimum of 10% from the employer and 8% from the employee’s monthly earnings. Employers can also choose to contribute the full 20%. Payments must be remitted to an approved Pension Fund Administrator (PFA).

Is NHF one of the statutory deductions in Nigeria?

Yes, the National Housing Fund (NHF) is a statutory deduction in Nigeria. Employees contribute 2.5% of their monthly basic salary, which employers are responsible for remitting to the Federal Mortgage Bank of Nigeria (FMBN).

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