Hauwa Obi got a promotion! She also received a pay raise in September 2020. Based on her understanding of Nigeria payroll, she was able to estimate her net salary after deducting statutory contributions. She was, however, surprised to receive a lower net salary in her bank account in June 2021. The net salary and deductions in her monthly payslip were not equal to the amount she expected. A deeper review showed that the statutory deductions were the same as the prior months while the PAYE tax was higher.
“Could there be a mix-up?” thought Hauwa. Even though she was very familiar with the different payroll contributions, Hauwa did not know the impact of the Finance Act 2020 on her employment income. An individual who makes social security contributions under the new law will receive lower net pay. Statutory payroll contributions of an employee reduce the gross income for computing Consolidated Relief Allowance. Like Hauwa, employees in Nigeria have to contribute a fixed percentage of their monthly salary as social security. The PAYE tax calculated must be in line with the Finance Act 2020.
Apart from an employee, a business needs to know the total payroll costs of hiring an employee in Nigeria, whether local or expatriate. This will help in proper payroll management. in Nigeria. Payroll costs in Nigeria include salary as well as statutory contributions that will be deducted and/or remitted to the relevant agency. This article, therefore, looks at the payroll, payroll tax, and social security contributions in Nigeria.
Types of Payroll, Tax and Statutory Contributions in Nigeria
One of the responsibilities of the Federal Government is the welfare and security of its citizens. Social security contributions help to fund the objective. As a mandatory payment, a person making social security contributions can receive a future social benefit. There are eight (8) major types of payroll deductions/contributions in Nigeria which companies should be aware of. While the first three (3) deductions below can reduce the taxable income and net salary of an employee, the fourth is tax while the last four are employer contributions.
1. Contribution to Pension Fund
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 emoluments stated in the contract of employment. Yet, it should not be lower than the sum of the basic salary, housing allowance, and transport allowance.
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 the NHF levy at the rate of 2.5% of employees’ monthly income 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 below the national minimum wage, currently ₦360,000, 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 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)
National Health Insurance provides easy access to health care 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. National Health Insurance Scheme applies to employees in the public sector and private companies with five or more employees. NHIS contribution varies on the type of employer.
For the Federal Government, the employer will pay 3.25% while the employee pays 1.75%. The total contribution will be 5% of the employee’s total salary. For other tiers of government and organized private sector, the employer will contribute ten percent (10%) of the employee’s basic salary while an employee contributes five percent (5%). However, the employer may contribute the entire fifteen percent (15%) or make additional contributions above the 10% to cover the health benefit. The health care covers the contributor, spouse, and four (4) biological children under 18 years of age. However, a contributor with more than six (6) family members can register the additional persons as dependent(s).
What then is the relationship between these statutory contributions and net pay? An employee’s contribution to NHF, NHIS, and an approved pension fund will reduce net pay and not taxable income. The revised method for determining gross income is based on the Finance Act 2020 and Business Facilitation (Miscellaneous Provisions) Act 2022.
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. At the end of the year, an employer must file an annual return for the income and PAYE tax. Also, the deadline for filing an annual payroll tax (Form H1) return is 31st January of the next year. Penalties are;
- Late payment: Penalty at 10% as well as interest at the ruling bank lending rates.
- Late filing of Form H1 return: ₦500,000 per annum.
Self-employed persons will file an annual self-assessment tax return by 31st March of the next year. The penalty for late filing is ₦50,000 per annum.
More details on Payroll tax in Nigeria is available here.
Illustration
Back to Hauwa Obi! Assuming her monthly gross income is ₦920,000, basic salary is 300k while housing is 200k. Other allowances are transport – 250k and feeding – 170k. Then, the payroll tax calculator will be
NHF: 2.5% * ₦920,000 = ₦23,000
NHIS: 5% * ₦300,000 = ₦15,000
Taxable income: Gross income – consolidated relief allowance – statutory deduction = ₦920,000 – 184,166.67 – (60,000 + 23,000 + 15,000) = ₦640,933.33
PAYE tax: ₦136,490.67
Therefore, net pay will be Gross income – PAYE tax – statutory contributions = ₦920,000 – 136,490.67 – 98,000 = ₦685,509.33
Under the old law, Hauwa’s payroll tax calculator was
PAYE tax: ₦135,506.67
Net pay: ₦701,993.33
Hauwa’s net pay dropped by 2.35%, while PAYE tax grew by 0.73%. The difference increases every month a taxable person uses the old method.
The difference increases every month a taxable person uses the old method.
To calculate payroll tax in Nigeria using the new tax law, sign-up for BRC online PAYE tax calculator.
5. Contribution to the Industrial Training Fund (ITF)
Any employer having 25 or more employees and outside a free trade zone shall contribute 1% of the annual payroll to the Industrial Training Fund (ITF). The scope also covers any supplier, contractor, or consultant who has more than 25 employees and is bidding contracts from any Federal Government agency, commercial, industrial, or private entity. 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. A copy of the document for new employer registration as well as for annual submission of returns is available in the training menu at https://itf.gov.ng. Furthermore, new and old employers will submit a complete set of Industrial Training Fund (ITF) return that contains the following documents.
- Evidence of ITF payment
- Duly completed ITF form
- Copy of the audited financial statement or management accounts
- Cover letter
The due date for filing an ITF return is within 3 months from year-end. The 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 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, the 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.
7. Expatriate Employment Levy (EEL)
EEL is an annual levy for companies that hire expatriate employees in Nigeria. The fee is US $15,000 US Dollars for directors and US $10,000 for other levels of expatriates. The amount is payable to the Nigeria Immigration Service (NIS). Although EEL was introduced in February 2024, the Federal Government has not fixed an effective date.
8. Development Levy
This is a flat rate of one hundred naira (₦100) per employee per annum. The amount is payable to the relevant State Internal Revenue Service of the employee.
Here is a summary of the responsible person for the different payroll costs in Nigeria.
The table below shows the Nigeria payroll contributions and the party to make payment.
Payroll costs in Nigeria Contribution by Deduction from Employer Employee Development Levy Yes No Expatriate Employment Levy Yes No Industrial Training Fund Yes No National Housing Fund No Yes National Health Insurance Scheme Yes Yes Nigeria Social Insurance Trust Fund Yes No Pay-As-You-Earn (PAYE) Tax No* Yes Pension Fund Yes Yes** Table showing who should contribute or deduct the Nigeria payroll costs.
Note: The employer may bear the
* – employee pension contribution on behalf of the employee.
** – PAYE tax for tax equalized employees.
Closing remarks
The revenue authority usually requires a taxpayer to provide evidence of remittance of tax reliefs during a tax audit. The tax authority will follow up with the employer for any outstanding payment. Where an employer wants to regularize the PAYE tax filings after an employee leaves an organization, there may be additional costs to recoup the taxes. Persons in a management capacity or business owners should seek professional guidance in complying with the numerous payroll obligations in Nigeria. To download this article on payroll, payroll tax and social security contributions in Nigeria, click here.
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