Payroll, tax and social security contributions in Nigeria

Hauwa Obi was excited to receive her first salary in September 2019. She was however surprised to see three statutory deductions on her payslip. “Could there be a mix-up?”, thought Hauwa. Even though she was very familiar with pension, Hauwa did not know social security contribution would reduce her net pay. Like Hauwa, employees in Nigeria have to contribute a fixed percentage of their monthly salary as social security. At the same time, employers are required to deduct and remit different amounts to the relevant agency. For instance, the House of Representatives recently began an investigation of 1,124 companies and parastatals on the non-remittance of the Nigeria Social Insurance Trust Fund levy from 2010 to date. This article, therefore, looks at the payroll, tax and social security contributions in Nigeria.

Statutory contributions

One of the responsibilities of the Federal Government is the welfare and security of its citizens. Social security contributions help to bridge the gap. As a mandatory payment, a person making social security contributions will be able to receive a future social benefit. While the first section examines three deductions that can be used to reduce the taxable income, the second part considers two contributions that are solely for an employer.

1. Pension contribution

The Pension Reform Act 2014 (PRA) creates a uniform contributory pension scheme (CPS) for the public and private sectors in Nigeria. Every employer in the public and private sector that have 15 or more employees will participate in a CPS for their employees. Members of the Armed Forces, the Intelligence, and Secret Services of the Federation are exempt from CPS. Also, CPS is optional for expatriates as foreign individuals often keep their offshore pension plan.

The employer and employee contributions are a minimum of 10% and 8% of the employee’s monthly emolument. An employer can contribute the entire amount, but it should be at least 20% of the employee’s monthly emolument. Here, monthly emoluments refer to the total emolument stated in the contract of employment. Yet, it should not be lower than the sum of the basic salary, housing allowance, and transport allowance.

Companies are required to deduct as well as remit the employee’s and employer’s monthly contribution to the Pension Fund Administrator (PFA). An employee is required to open retirement savings account with an approved PFA. The due date for remitting pension contribution is seven working days after the payment of salaries. Non-compliance attracts a penalty of at least 2% of the unpaid amount. An employee can also file a whistle blowing report where an employer does not pay retirement benefits correctly or promptly. PRA further provides that private organizations with less than three employees will be governed by guidelines. In March 2019, the National Pension Commission (PenCom) launched the Micro Pension Plan (MPP). The MPP seeks to provide pension services to self-employed persons in the informal sector and organizations with less than three employees. This leaves a gap for companies with 3 to 15 employees.

Micro-pension plan in Nigeria

2. Contribution to the National Housing Fund (NHF)

The main goal of NHF is to offer loans to Nigerians for developing, buying or renovating houses. Contributors of the Fund can get long term loans from Mortgage Institutions. Employers are required to deduct NHF levy at the rate of 2.5% of employees’ monthly basic salary and remit the amount to the Federal Mortgage Bank of Nigeria within one month after the deduction of NHF. An employer is also required to register an employee with NHF. Employees with an annual income of below ₦3,000 and expatriates are exempt from the Scheme. Penalties vary as follows;

Failure to deduct or remit NHF: Employers ₦50,000, self-employed person ₦5,000 or one-year imprisonment on conviction or both.
Obstructing deduction or remittance: ₦5,000 or one year imprisonment or to both; on conviction.
Failure to make a deduction on behalf of the employer: ₦50,000 or 5-years imprisonment or both (on conviction).

3. Contribution to the National Health Insurance Scheme (NHIS)

NHIS provides easy access to healthcare for all Nigerians at an affordable cost through different prepayment plans. As a type of Social Health Insurance, contributors can enjoy Health Care Services from the pool of funds created. NHIS applies to every employer with at least ten employees. An employer will contribute 10% of the monthly basic salary of an employee while an employee contributes 5%. The health care covers the contributor, spouse and four biological children under 18 years of age. However, a contributor with more than six family members can register an extra dependant. What then is the relationship between these statutory contributions and net pay? An employee’s contribution to NHF, NHIS, and an approved pension fund can be used to reduce the taxable income. These deductions also lower the net pay and PAYE tax.

4. PAYE Tax

The Personal Income Tax (Amendment) Act 2011, PITAM, covers the taxation of individuals. Under PITAM, taxable persons include employees, sole proprietors, artisans, and partnerships. The PAYE tax rate ranges from 7% on taxable income of ₦300,000 and 24% for above ₦3,200,000. Furthermore, an employer handles deducting and remitting monthly taxes on an employee’s salary. The due date for remitting monthly PAYE tax to the relevant tax authority is within 10 days after the month of deduction. Self-employed persons will file an annual self-assessment tax return by 31st March of the next year. Penalty for late filing is 10% as well as interest at the ruling bank lending rates. More details on PAYE tax is available here.

Illustration

Back to Hauwa Obi! Assuming her monthly gross income is ₦250,000, basic salary is 100k while housing is 60k. Other allowances are transport – 40k and feeding – 50k. Then, the payroll tax calculator will be

Pension: 8% * ₦(100,000 + 60,000 + 40,000) =16,000

NHF: 2.5% * 100,000 = 2,500

NHIS: 5% * 100,000 = 5,000

Taxable income: Gross income – consolidated relief allowance – statutory deduction = ₦250,000 – 66,667 – (16,000 + 2,500 + 5,000) = 159,833

PAYE tax: 24,232

Therefore, net pay will be Gross income – PAYE tax – statutory contributions = ₦250,000 – 24,232 – 23,500 = ₦202,268

Without the deductions, Hauwa’s payroll tax calculator would have been

Taxable income: Gross income – consolidated relief allowance = ₦250,000 – 66,667 = ₦183,333

PAYE tax: 29,167

Therefore, net pay = Gross income – PAYE tax = ₦250,000 – 29,167 = ₦220,833

By contributing, Hauwa’s net pay reduced by 9.17% while PAYE tax dropped by 20.36%.

5. Industrial Training Fund (ITF) contribution

Every employer with at least five employees or an annual turnover of ₦50 million must contribute 1% of its annual payroll cost to the Industrial Training Fund. ITF aims to equip indigenous workers with adequate skills for economic development. An employer can, therefore, claim a refund of up to 50% of the amount contributed; if employees received appropriate training.

First-time employers have to register for ITF at the relevant zonal office. Furthermore, new and old employers will submit a complete set of ITF return. It includes evidence of ITF payment, completed ITF form, copy of the audited financial statement, and cover letter. A copy of the document for new employer registration as well as for annual submission of returns is available n the training tab in https://itf.gov.ng. The due date for filing ITF return is within 3 months from year-end. Penalty for late payment is 5% of the unpaid sum. It is payable for every month of default or part of a month after the date of default.

Note: ITF is an annual payroll contribution for the employer only.

6. Contribution to the Nigeria Social Insurance Trust Fund (NSITF)

The Employees’ Compensation Act (ECA) 2010 provides a definite and adequate compensation for workers or their dependents in the event of death, injury, disease or disability arising out of, or during, employment. The Act also aims to provide safer working conditions for employees by ensuring that all relevant stakeholders help to avert workplace disabilities and work-related risks. Employees refer to persons in the formal and informal sectors of the economy. However, members of the Armed Forces of the Federal Republic of Nigeria are exempt from the Scheme.

NSITF applies to every employer and employee in the public and private sectors. Employers will, therefore, contribute 1% of employees’ monthly payroll to the NSITF in the first two years of commencement of the Act. (Payroll means remuneration defined in the Act, excluding pension contributions, bonuses, overtime payments, and one-off payments such as 13th-month income). Thereafter, NSITF Board will perform a risk assessment to classify contributions on workers’ exposure and estimate the appropriate payments. This contribution is not a deduction from an employee’s monthly salary. Rather, it is a statutory payroll contribution by an employer.

Non-payment of contribution attracts a penalty of 10% of the unpaid assessment or the value of the security required. Any employer who fails to provide the necessary payroll information to the Board may be liable to pay the best of judgment assessment levied by the Board, including a penalty. Also, an employer or the responsible officer may be liable to imprisonment, a fine or both.

Closing remarks

Regulatory agencies should continue to educate citizens on the benefits of participating in a social security plan. Transparency and accountability of public funds will also increase the compliance rate of contributors. Otherwise, people will be unwilling to contribute or remit statutory deductions. Above all, employers should seek professional guidance in complying with the numerous payroll obligations in Nigeria.

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