I've got several requests on how to prepare payroll from gross earnings to net pay.
I will be addressing this issue here today. If you need more clarifications, don't hesitate to ask.
The opinion shared here is in compliance with the law (Personal Income Tax Act 2010, as amended) and what is obtainable in the private sector.
TOTAL GROSS PAY
When an individual employment is confirmed, (s)he is given his letter of appointment which contains also his/her total emoluments. The gross earning is further broken down (according to company policy) into different pay elements of Basic, Housing, Transportation, meal, security, clothing etc. For example, if an individual receives a gross amount of say N1,200,000.00 ( one million two hundred thousand naira) annually. That's 100k monthly. The company might decide to break it down into basic 500k, housing 200k, transportation 150k, meal 100k and security 50k. Like I said earlier, this is at the discretion of the company.
STATUTORY DEDUCTIONS
In preparing the payroll, after determining the gross earning, there are some statutory amount that is expected to be deducted from the gross earning. These include PAYE, pension and NHS. According to PITA 2010 (as amended) , pension and NHS are deducted first before charging PAYE. The percentage of Pension is minimum of 7.5% of the gross earning for both the employee and employer (note: only the employee's amount is deducted from the payroll). The NHS is 2.5% also of the gross earning. When the above deductions have been made then for the PAYE can now be deducted from the net (of pension & NHIS). The net is subjected to the PAYE using the tax table which is:
First 300k - 7%, next 300k - 11%, next 500k - 15%, next 500k - 19%, next 1,600k - 21% and above 3,200k 24%.
If after the table is applied and the tax payable is less than 1% of the gross earning, then the tax payable will be 1% of gross earning (I.e. Minimum tax).
NET PAY
The net pay is what the employee receives at the end of the day. From our example above. The pension value will be 75k I.e 7.5% of 1.2m. And the NHS will be 25k (2.5% of 1.2m). The net of this is 1.1m. This amount is to be subjected to tax as follows:
First 300k @ 7% = 21k, next 300k @ 11% = 33k, next 500k @15% = 75k. Total tax payable is therefore 129k. This amount compared to the minimum tax ( 1% of 1.2m= 12k) is still higher, therefore tax payable is still 129k pa. Approx 10.75k monthly. Total net pay is now; 1.2m - 75k - 25k - 129k =971k approx 80.91k monthly.
LEGAL WAYS TO REDUCE YOUR TAX PAYABLE
Everyone always don't want to pay more and especially not for something they don't enjoy. To reduce your tax liability with respect to PAYE tax some options to explore are;
1. You can increase your pension contributions. This will in turn reduce the amount taxable.
2. Take up a life insurance. This also can reduce the taxable amount which in turn will reduce your tax payable.
Please drop a comment, question or query.
Thank you.
I will be addressing this issue here today. If you need more clarifications, don't hesitate to ask.
TOTAL GROSS PAY
When an individual employment is confirmed, (s)he is given his letter of appointment which contains also his/her total emoluments. The gross earning is further broken down (according to company policy) into different pay elements of Basic, Housing, Transportation, meal, security, clothing etc. For example, if an individual receives a gross amount of say N1,200,000.00 ( one million two hundred thousand naira) annually. That's 100k monthly. The company might decide to break it down into basic 500k, housing 200k, transportation 150k, meal 100k and security 50k. Like I said earlier, this is at the discretion of the company.
STATUTORY DEDUCTIONS
In preparing the payroll, after determining the gross earning, there are some statutory amount that is expected to be deducted from the gross earning. These include PAYE, pension and NHS. According to PITA 2010 (as amended) , pension and NHS are deducted first before charging PAYE. The percentage of Pension is minimum of 7.5% of the gross earning for both the employee and employer (note: only the employee's amount is deducted from the payroll). The NHS is 2.5% also of the gross earning. When the above deductions have been made then for the PAYE can now be deducted from the net (of pension & NHIS). The net is subjected to the PAYE using the tax table which is:
First 300k - 7%, next 300k - 11%, next 500k - 15%, next 500k - 19%, next 1,600k - 21% and above 3,200k 24%.
If after the table is applied and the tax payable is less than 1% of the gross earning, then the tax payable will be 1% of gross earning (I.e. Minimum tax).
NET PAY
The net pay is what the employee receives at the end of the day. From our example above. The pension value will be 75k I.e 7.5% of 1.2m. And the NHS will be 25k (2.5% of 1.2m). The net of this is 1.1m. This amount is to be subjected to tax as follows:
First 300k @ 7% = 21k, next 300k @ 11% = 33k, next 500k @15% = 75k. Total tax payable is therefore 129k. This amount compared to the minimum tax ( 1% of 1.2m= 12k) is still higher, therefore tax payable is still 129k pa. Approx 10.75k monthly. Total net pay is now; 1.2m - 75k - 25k - 129k =971k approx 80.91k monthly.
LEGAL WAYS TO REDUCE YOUR TAX PAYABLE
Everyone always don't want to pay more and especially not for something they don't enjoy. To reduce your tax liability with respect to PAYE tax some options to explore are;
1. You can increase your pension contributions. This will in turn reduce the amount taxable.
2. Take up a life insurance. This also can reduce the taxable amount which in turn will reduce your tax payable.
Please drop a comment, question or query.
Thank you.
Sir do we still divide salaries into units like basic pay, housing etc and then work the tax on the basic salary? My boss (FCA) said taxes are now on gross pay - pidivine
ReplyDelete@Pidivine, your boss is right, paye is calculated on total gross. And yes payment are still being divided into elements, this is because other deductions (like Pension) are dependent on certain elements (basic, housing and transport) and nit on the total gross.
DeleteSir, I believ pension is calculated at7.5percent on addition of basic,housing and transport and not on gross income
ReplyDeleteYou're correct @Toye...the assumption here is a simple payroll with limited elements of basic, housing and transport.
DeleteIf you read my response to the other poster up^^^(Pidivine), you'll notice I mentioned it.
Thanks for your observations.
I am an ACTI holder wt no experience,do u provide trainin 4 people on tax practice. My email: kunle4toye@yahoo.com
ReplyDeleteHi Toye, we currently do not provide any training for people in tax practice. But soon we'll.
DeleteThe services we provide are listed on my profile...please check it.
Thanks for your enquiries.
sorry am new but i think the calculation on 7.5% of 1.2m and also 2.5% is not correct pls check well. i will like to make an enquiry abt d registration into ican becos, am an hnd holder and wat stage am i going to start from. thank you for your hard work.
ReplyDeleteThe above 7.5% calculation of Pension is based on the Pension Reform Act 2004 and as such correct, however, with the a new Act in 2014, the rate of contribution is now 8% and 10% for employee and employer respectively. The 2.5% NHS is also correct as per the NHIS Act. However in practice, companies prefer to pay that amount on behalf of the employee and is as such not available for relief.
ReplyDeleteAs for your enquiry on ICAN, I"ll suggest you download the new syllabus to see the available exemptions.