I am not an expert in Taxation. So no one should read this piece expecting some technical perspective on tax issues from a tax guru. I am just a guy who works, gets paid and sees a deduction of personal income tax from his pay-slip. The good news, however, is that you don’t have to be a tax expert to understand how to calculate your taxable income. All you need is a pen, paper and a good old reliable calculator.
I recall many difficult conversations I have had with colleagues at work, many of them junior staff who come to me with their pay-slips, upset and sometimes crying at the amount of tax that is taken out of their salaries. Most times it is after a bonus has been paid, or an allowance paid, and they see a huge chunk of it vanish right before them in the name of Personal Income tax. My advice to them will form the crux of my article – You can never win the argument of your tax liability while arguing on the basis of sentiment. You have to argue it on the basis of fact. Meaning, you have got to:
1. Know how your Personal Income Tax is calculated and based on that,
2. Make your own calculation.
Now, most people look at the tax deducted from their pay and just feel in their gut that it is plainly incorrect. They believe it is excessive and they are being cheated either by their employer or by the State. While this feeling is valid, it is most times not sufficient. You cannot go to your employer or the tax authorities and say – “I know in my gut that I am being overtaxed”. If I was your employer, I will gladly ask that we undertake a surgical procedure to find out for real what is in your gut.
No one likes to pay tax. Including me. There are many reasons. From corrupt public officials to inadequate infrastructure, to lack of security and social amenities. There are enough reasons to whip up a moral resentment and even argument against the payment of tax. It was this same scenario that Jesus faced when he was asked by his disciples if they should pay tax. Even in biblical days, the tax collectors were known to be corrupt, enriching themselves with the tax of ordinary citizens and being grossly insensitive to the plight of the people. They were a class of people you love to hate. Jesus, however, represented a moral authority, and the people felt that he would answer that question (of whether they should pay tax or not) on the basis of morality and not legality. Unfortunately, Jesus disappointed them, and may I say - us all - by saying “Give unto Caesar what belongs to Caesar….”. Jesus sided with legality and that ended the conversation from a moralistic point of view. If you are ever going to win the battle of taxation, you have to do it from a factual and legalistic point of view.
How Personal Income Tax is calculated?
1. Annual Charge—The first thing you need to realize is that the income tax is an annual charge that is based on your annual income. It is the annual tax that is then divided by 12 months to determine what your monthly tax is.
2. Total Income—This is the computation of all your taxable items. Which may include “Benefits in Kind”. Your basic salary plus other allowances would be added together to make up your annual income. This is where there are usually a lot of issues, since what is taken here by your employer or the State as your total income will determine how high or low your income tax will be. One major change in the new tax law was that “Benefit in kind” is now specifically included in gross emolument and by implication, taxable income. It wasn’t so before.
3. Total Relief—Your tax is calculated after the maximum relief applicable to you is applied. So if you are a worker in Nigeria, you must know what the relief applies to you as per the Personal Income Tax Act of 2011 as amended says. The act prescribes the following reliefs:
- Personal Allowance Rate—20% of Gross Annual Income
- Personal Allowance Amount—N200,000.00 or 1% of Gross income (whichever is higher)
- Pension Allowance—8% of Annual Basic Salary + Transport + Housing Allowance
- Others: N2,500 per child (to a maximum of 4), N2,000 per dependent (to a maximum of 2)
This is all the relief you get in a year. This is the maximum relief your government thinks you deserve.
4. Taxable Income—This is the difference between the Total Income and the Total relief. Once the taxable income is determined, the rest is just a simple exercise of applying the graduated tax band.
5. Graduated Tax Table—The tax table tries to break down the total tax payable by income group. Thus we have the following break-down
- 1st N300,000.00 of Annual Income – 7% (or N21,000)
- 2nd N300,000.00 of Annual Income – 11% (or N33,000)
- Next N500,000.00 of Annual Income – 15% (or N75,000)
- Next N500,000.00 of Annual Income – 19% (or N95,000)
- Next N1,600,000.00 of Annual Income – 21% (or N336,000)
- Annual Income Above N3,200,000.00 – 24%
So, if, for instance, your annual taxable income (after removing relief) is N5m, you merely need to add the first 5 categories together, i.e. N21,000 + N33,000 + N75,000 + N95,000 + N336,000 = N560,000.00 and calculate 24% on the difference between N5m and N3.2m = N432,000.00. Your Total Tax will then be—N560,000 + N432,000.00 = N992,000.00 P.A. When divided by 12, you will get a monthly tax charge of N82,666.67
If, however, your annual taxable income is not more than N1,600,000.00 p.a., your maximum tax liability cannot be higher than N560,000.00 p.a. i.e. N46,666 per month.
Now usually, the tax authorities will come around your organization to do a tax audit. Basically, what the tax auditors are looking for is evidence of tax evasion or evidence to show that the company did not apply tax on all benefits. If they find any, for instances benefits paid out in cash vouchers as against pay-slip, these values are added back to the taxable income and the income tax re-calculated. With the addition of penalties, the tax authorities will sometimes issue a tax liability that looks much higher than what had been remitted.
While some corrupt officers see this as an easy way to make money in the way of negotiated settlements, most companies really do not like to be faced with this kind of liability and they usually react by ensuring that every item identified as taxable is included in your pay-slip. The immediate impact of this is that it will shoot up the tax commitment of the staff and will lead to the kind of difficult conversations with staff that I described above.
So what should you do if you suspect that you are being over–taxed?
1. Request to know from your employer all the inputs that have gone into computing your taxable income. Usually, this should already be on your pay slip. But in case it is not there, you have a right under law to demand it from your employer. Check to be sure that some tax-free reimbursements like medical and dental expenses are not added.
2. Once you know the input, determine which elements are annual and which are not. Most payroll systems are set up to assume that all monthly inputs are annual. So even when you are getting a one-off bonus (like Christmas Bonus), the system automatically multiples it by 12 instead of 1. Understand that the point of all the calculations is for you to determine your true and accurate annual income and from there your annual taxable income.
3. Watch-Out for Arrears – Most people experience a tax hike when they are paid arrears. What they do not realize is that the employer in paying the arrears also assumes that you started collecting the income way from when the arrears started and calculated the back tax. This however does not apply if your salary was increased mid-year (without arrears). It merely means that your annual income and taxable income has increased going forward.
4. Put your computation in a verifiable form—Usually, an excel sheet will work wonders here. The point is to allow for your calculations to be verified for possible errors and confirmed to be correct. When you do this, you force your employers or the tax authorities to also provide a break-down themselves of how they got your tax.
5. When a claim is substantiated, make a formal request to your employer for a tax refund. Most often you will get the refund as a reduction in tax in the subsequent month. But this must be formalized.
Let me conclude by saying again. You do not need to be a TAX EXPERT to be able to calculate your income tax. It is not difficult. It is not complex. It’s just plain MATH.
Stop the crying, stop the moaning, stop the taking prayer request to the church for them to bind and loose your boss or employer. Just get on your computer and do some basic primary school calculations. Some good citizens have even made the calculation easier now. Just Google “PAYE Tax Calculator” and you will see various free and downloaded MS Excel templates you can use to calculate your tax. Remember, life never excuses ignorant people.