Relevant Facts on Personal Income Tax
If you're an employee, employer or even a self-employed person, you have probably heard about the Personal Income Tax. But just how much knowledge do you have about this type of income tax? Well, we have put together all that you need to know about the personal income tax in this quick read!
Personal Income Tax
Personal Income Tax (PIT) is a tax charged on the income of a person. It is regarded as a specific amount levied on individuals or businesses by the government on the income generated from operating within the country’s jurisdiction. Individuals are charged on their wages, salaries, financial compensations, or any other remuneration they receive for a service rendered while corporate organizations, partnership arrangements, small-scale businesses, and self-employed individuals are taxed on their income. Most countries operate on a progressive income tax system in which high-income earners pay a higher tax rate than low-income earners.
Employees pay tax in the country they reside and the three major criteria for PIT to be paid in Nigeria include cases where the; employee either works full-time or part-time in Nigeria, the employer is in Nigeria or the employer has a fixed base of operations in Nigeria.
In Nigeria, the government imposes the payment of Personal Income Tax on the incomes of individuals, trustees, executors, families, and communities of any settlement.
The major legislation guiding the Personal income tax in Nigeria is the income tax Amendment Act and Finance Act 2020. The Finance Acts 2019 and 2020 rectified a broad spectrum of the Nigerian tax laws and one of the amended laws is the Personal Income Tax (PIT) Act.
Although the payment of PIT is a federal commitment, PIT must be remitted to the Inland Revenue Service (IRS) of the State in which the individual resides or where the business is located within the country.
Under the Personal Income Tax Act, an individual’s place of residence is a specific location in Nigeria accessible to them for their domestic or family use on a regular day. Hotels, guest houses, or other temporary lodges are excluded from the list of places except in cases where no more permanent places are available for their use on that day. Once a place of residence is determined, the tax authority of the state or region in which the taxpayer has their place of residence is the appropriate tax authority of the taxpayer. Simply put, an individual is required to pay their PIT in the state they live in irrespective of the organization or body that employs their services or skills.
Income taxes constitute a main source of funds for the government and are used to finance major government projects like road construction, providing good schools or services like proper healthcare amongst others, all for the benefit of its citizens.
According to the law, the Federal and States’ tax authorities are permitted to identify persons residing in or receiving income from Nigeria who is obliged to pay tax. They have the right to assess and tax the incomes of the identified individuals using specific regulations. This law also guides the tax officials in identifying the residence of potential taxpayers, as well as the sources of their remunerations to tax the income.
Types of Personal Income Tax
There are two personal income taxes employed in Nigeria;
Pay-As-You-Earn (PAYE):
PAYE is a taxation system in which personal income taxes are taken from the financial compensations of the employee by the employer and remitted to the government via the designated tax authority according to laws provided by the relevant sections of the Personal Income Tax Act (PITA). The due date for payment of PAYE tax is the 10th day of the month succeeding the previous month of deduction. The deadline for filing returns for PAYE is the 31st of January of the succeeding year. The tax authority in which an employee’s PAYE is to be remitted is dependent on the state the employee resides in according to the rule of residence. It is then left to the employer to deduct the percentage to be paid from the salary or wage and remit it to the appropriate tax authority.
Direct Assessment of Self-employed Persons
According to the Lagos Internal Revenue Service (LIRS), the Direct Assessment tax is an assessment scheme that pertains to self-employed persons (ranging from Professionals, Entrepreneurs, Contractors, or other self-employed individuals). The self-employed individual is expected to pay their personal income tax to the designated tax authority and file a return of income earned throughout the year. The proposed date for filing returns and PIT remittance is the 31st of March of every year.
Rate of Personal Income Tax in Nigeria
The rate of income tax depends on the amount of taxable income the employee is accountable for.
Taxable income refers to the fraction of an individual’s income used to determine how much tax is to be remitted to the government in a given tax year.
Think of it this way, when the allowable expenses are deducted from the employee’s income, the resulting amount is the taxable income which is then divided by the tax rate to arrive at the tax due to be paid. Taxable income is evaluated to charge at specific percentage rates ranging from 7 percent to 24 percent, depending on the income bracket being evaluated.
The rate applied for different annual taxable income amounts in Nigerian Naira has been expressed below;
First 300,000 — 7%
Next 300,000 — 11%
Next 500,000 — 15%
Next 500,000 — 19%
Next 1,600,000 — 21%
Over 3,200,000 — 24%
Sanctions For Tax Evasion
Just in case you were wondering if there are sanctions for avoiding or bypassing PIT payments. Yes, there are penalties for tax evasion. Failure to pay your income tax is an offense according to laws guiding income tax payments in Nigeria. Failure to remit the payment can result in an added 10% charge of the unpaid fee.
Did you know that…
The Consolidated Relief Allowance (CRA) is a fee granted to a taxpayer to reduce the tax burden on the taxpayer. Under the Nigerian Income Tax laws, all taxpayers are entitled to a CRA of 20% of gross income plus a higher of 1% of gross income or N200,000.
With PrimePayroll, an enterprise cloud service for payroll and human resource management, you can configure with a high degree of flexibility tax formulas and relief that exist in your country of residence. It comes out of the box pre-configured with the Nigerian PIT/PAYE laws.
