Steps To Calculate Your Tax in Nigeria

CalculateTaxTaxes are paid everyday by both citizens of a country and visitors. So many of us find tax deduction ridiculous and complicated. But it is good if we are able to know how our taxes are deducted from our daily income.

Taxes is divided into two, indirect taxes and direct taxes. Indirect taxes are taxes like VAT (Value Added Tax) and WHT (Withholding Taxes). Direct taxes are basically under what is called Personal Income Tax and they deducted from our income or salary. Indirect taxes are not deducted from our earnings directly, we pay them when we go to buy things at the stores or demand for a particular service.

Lets now see the steps we can take to calculate our taxes.
If an individual earn a salary package of N1.2m per annum (100k per month).

Step 1 – Get the breakdown of the components of your salary. See example below

Basic Salary                          690,000

Housing Salary                      150,000

Meal Allowance                      60,000

Entertainment Allowance         60,000

Utility Allowance                     80,000

Transport Allowance               91,000

Leave Allowance                    69,000

Total                              1,200,000

Step 2 – Deduct reliefs and allowances from your salary. The Inland Revenue usually tax you on your entire salaries after deducting some reliefs and allowances. The reliefs and allowances deducted for tax purposes are

Housing – Maximum of N150k per annum

Leave Allowance – Not more than 10% of your Basic Salary

Transport Allowance – N20k per annum

Utility Allowances     –  N10k per annum

Meal Subsidy    – N5k per annum

Entertainment Allowances – N6k per annum

Children Allowance –  N2.5k per kid (maximum of 4kids)

Dependent Relative Allowance – N2k per annum (maximum of 2 dependents)

Reliefs are 20% of your Annual Basic Salary plus N5k

NHF (Mandatory National Housing Fund Contribution) – 2.5% of your Basic Salary

Pension Contribution – 7.5% of your Basic plus Transport and Housing Allowances

All of the above is deducted from the N1.2m

Step 3 – Calculate the deductions

Annual Salary  –                                                                    1,200,000

Deductions Housing Allowance             150,000

Transport Allowance                               20,000

Meal Allowance                                       5,000

Entertainment Allowance                    6,000

Utility Allowances                                  10,000

Personal Allowance                               245,000

Child Allowance                                      10,000

Dependent Relative                               4,000

Leave Allowance                                   69,000

NHF                                                             17,250

Pension                                                  69,825

Total Deductions                                606,075                    606,075

Balance after deductions (N1,200,000 less N606,075) = N593,925 It is this balance that will now be taxed by the Inland Revenue.

Step 4 – Apply tax rates

You first of all tax the first N160k of the N593,925 in the following order

Taxable Amount          –     N593,925

5% of 1st 30,000        –         1,500
10% of next 30,000      –         3,000
15% of next 50,000     –          7.500
20% of next 50,000      –        10,000
Total Tax for first N160k  is N22k (1.5k+3k+7.5k+10k)

25% of what is left – N433,935 (N593,925-160,000) = N108,481.25

With the above calculations the total tax is N108,481.25 + 22000 = 130,481.25 per annum.

Tax Per month is N10,873.43.

Please not that people earning the same salary of N1.2m can actually pay different amount of taxes depending on how well the accounts department or HR department spread your pay package.

With the above steps you could apply it to your allowances and see how much you pay for tax.

These above steps is majorly for salary earners. But for the self-employed, you can also follow the above steps, though there is a Self Assessment schedule that the Lagos government has put in place for them. Salary earners should not bother using the Self Assessment schedules because its majorly meant for the self-employed. For instance if a Salary earner has an annual income of N1.2m, when you use the schedule it gives you a tax of N177,250 against N130,481.25.

Note: If you have an “Owner Occupier House” that you pay interest on, then the interest you pay will be added as one of your deduction when you are paying tax. For example if you took a loan to build your house, you live in the house and pay say N1m on interest on loan obtained to build the house, then that amount should be deducted from the taxable income before computing tax.

Business-matter has been able to gather this information for all our cherished readers. We hope this be of help to all salary earners and likewise to the Self-employed.

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