Easy Methods to Calculating your Personal Income Tax in Nigeria

What is Tax?

A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable by law. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent.

The levying of taxes aims to raise revenue to fund governing or to alter prices in order to affect demand. States and their functional equivalents throughout history have used money provided by taxation to carry out many functions. Some of these include expenditures on economic infrastructure (roads, public transportation, sanitation, legal systems, public safety, education, health-care systems), military, scientific research, culture and the arts, public works, distribution, data collection and dissemination, public insurance, and the operation of government itself. A government’s ability to raise taxes is called its fiscal capacity.

When expenditures exceed tax revenue, a government accumulates debt.

Personal Income Tax

Many jurisdictions tax the income of individuals and of business entities, including corporations. Generally, the authorities impose tax on net profits from a business, on net gains, and on other income. Computation of income subject to tax may be determined under accounting principles used in the jurisdiction, which tax-law principles in the jurisdiction may modify or replace.

Income-tax systems often make deductions available that reduce the total tax-liability by reducing total taxable income. They may allow losses from one type of income to count against another – for example, a loss on the stock market may be deducted against taxes paid on wages. Other tax systems may isolate the loss, such that business losses can only be deducted against business income tax by carrying forward the loss to later tax years.

Easy Methods to Calculating your Personal Income Tax in Nigeria

Without the stress that are commonly involved in the process of calculating personal income tax, you will master and begin to teach the A to Z clues of it your when you patiently go through the following list:

1. CONSOLIDATED SALARY/GROSS EMOLUMENT

Determine the consolidated salary which is the gross emolument of the Tax Payer Per Annum. That is Basic Salary, Housing, Transport, Leave, Utility, Furniture, Meal Allowances etc. Multiply by 12 to get the gross Per Annum e.g Basic Salary N50,000, Housing N20,000, Transport N10,000, Meal N10,000 and Furniture N10,000.

Total = N100,000 Per Month. Therefore N1,200,000 Per Annum (N100,000X12)

2. CONSOLIDATED RELIEF ALLOWANCE

A Tax relief of N200,000.00 or 1% of the Consolidated Salary, whichever is higher, plus 20% of the Consolidated Salary is given. Less N200,000 from the N1,200,000. Also, less 20% from N1,200,000 = N240,0000. Therefore CRA = N200,000 + N240,000 = N440,000.

3. TAX-EXEMPTED ITEMS

You can check Tax payer’s items from which deductions are not made from the following:

• National Housing Fund Contribution (Mandatory contribution of 2.5% of monthly income of Nigerians earning N3000 and above per annum)
• National Health Insurance Scheme (5%)-Life Assurance Premium (Tax deductibility applies if withdrawn within 5 years)
• National Pension Scheme (8% of Basic, Housing and Transport)

4. ASCERTAIN THE CHARGEABLES

Compute taxable income based on steps 1 to 3 which is less CRA from consolidated salary. E. g. Less N440,000 (CRA) from N1,200,000 = N760,000. For earnings of N1,200,000 the chargeable income therefore is N760,000.

5. INCOME TAX RATES

Apply the Tax Band to the Chargeable Income to arrive at the tax payable per annum:

FirstN300,000@7%N21,000

NextN300,000@11%N33,000

NextN500,000@15%N75,000

NextN500,000@19%N95,000

NextN1,600,000@21%N336,000

OverN3,200,000@24%

Therefore, for a Chargeable Income of N760,000, the Tax will be:

1stN300,000 @ 7% = N21,000 (Remaining N460,000)

NextN300,000@11% = N33,000(Remaining N160,000)

Next N500,000 @ 15% = N160,000

X 15% = N24,000.

Total Tax payable per Annum = N21,000+33,000+24,000 = N78,000 PA

6. MONTHLY TAX PAYABLE

The Tax Payable Per Annum is divided by 12 e.g N78,000 divide by 12 = N6,500 Per Month. Therefore the tax payable every month shall be N6,500 on the PAYE Scheme.

7. MINIMUM TAX DETERMINATION

Where the Chargeable Income obtained is lower than 1% of the consolidated or gross emolument then 1% of the consolidated salary shall be the Tax Payable Per Annum.