Taxes 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
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
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.