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How to calculate your taxes

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Salary earners in Nigeria are mandated by law to pay tax under the Pay As You Earn (PAYE) scheme. Every month a portion of your salary is deducted as tax leaving you with a net salary to take home.

Taxes under the PAYE scheme fall under the jurisdiction of the State Inland Revenue Service, meaning that all the taxed you pay are remitted to the state of your residence.

For example, if you live in Ogun State but work in Lagos, you are liable to pay tax to Ogun State and not Lagos State.

Nigerian Personal Income Tax Laws have evolved over the years with several amendments introduced to align with the income of Nigerians. The latest amendment was in 2012 when the Goodluck Jonathan Administration signed into law an Amended Personal Income Tax Act, replacing several controversial sections of the act with a simpler and easy to calculate taxable income.

The new amendments affect several sections of the Personal Income Tax Act, particularly Section 33 which deals with Personal Relief and Relief for Children, dependants, etc. This has now being replaced with a Consolidated Relief Allowance (CRA) of N200,000 + 20% of gross income.

They have also reviewed the Minimum Tax upwards from 0.5% to 1% and the Tax Table has also been notably amended.

In this article, we will demonstrate how your personal income tax is calculated using the example of a taxpayer named Mr Ahmed.

How to calculate your tax payable
Mr Ahmed earns an Annual Salary Package of N3 million including leave allowance. Mr Ahmed also contributes 2.5% of his basic to the National Housing Fund to enable him to secure a loan.

Step 1:

For tax purposes we can break-down his salary as follows:


Step 2:

Following which we can now apply the Consolidated Relief of N200,000 plus 20% of Earned Income and also deduct exceptions such as National Housing Fund Contribution (NHF) which is 2.5% of your Basic and also Pension which is 8% of your Basic+Housing+Transport to arrive at your Taxable Income; Please see below:


Step 3:

Mr Ahmed will now be taxed on N1,986,538.35 using the new tax table.

From the table above, Mr Ahmed will expect an annual tax deduction of N305,173.05 or a monthly tax deduction of N25,431.09. This is a 10.17% effective tax rate for Ahmed. And this is what his take-home will look like:

 

The amended law makes it very easy to calculate income taxes unlike before, thus eliminating most of the loopholes that were previously being used to exploit taxpayers.

But how can I reduce my taxable income?

The new PAYE template introduced in 2012 makes it more difficult to reduce the amount of taxable income you are subjected to. However, there is still something you can do to reduce your taxable income.

Pension

To encourage pension contribution the Government allows employees to contribute more than 8% of your basic, housing, and transport as a pension contribution. By doing so, you get more tax reliefs, thus lower taxable income. Using the example above, assuming you decide to increase your pension contribution from 8% to 10%, your monthly taxes reduce to N24,623 as depicted below:

It is important to note that by doing this your take-home pay will reduce as your salary will be deducted for the extra pension that you contribute. However, you get compensated for this by the extra return you earn on your pension contributions as well as paying lower taxes. Also, assuming you decide to resign and cash in on your pension within 5 years of contributing it, the new pension reform act of 2014 requires that the additional portion contributed will be taxed. Therefore, you will also have to have contributed it for a period of over 5 years to get a tax rebate.

Life Assurance

Life Assurance premiums are those premiums you pay towards insuring an immediate family member in the event that you die. There is no limit to how much you can contribute and how much relief you can get from it. The higher your life assurance, the higher the relief that you get. Assuming Mr Ahmed paid a premium of N500,000 in life assurance during the year and also contributes 10% as a pension, His taxes will look like this:

You can see that the tax per month has dropped to N16,139 as against N24,623 when he didn’t pay premiums on life assurance. Just like the increase in pension contribution, this also dents your take home but you get the benefit similarly.

Below is a simple template to help calculate your taxes by yourself. Send us an email or drop a comment if you have issues using it. Help us to help you.

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NAIRAWISE

7 money mistakes you must avoid now

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I am sure you have read a lot about the above subject but I believe these points are different from what you must have see or read and would be quite useful for you. That is if you are disciplined. Enjoy the read:

Never Ever Lend Money Kept In Your Custody.

There is a reason you were chosen to keep the money. People do not joke with their money and so they carefully choose who keeps corporate funds. Even thieves chose trusted people to keep their money.

When you betray the trust of people for whatsoever reason, you’ve soiled your name. You will lose social capital, which is a very important capital (this is one of those, not everything that counts that can be counted). That is very hard to undo. Whatsoever happened, it’ll be hard for people to forget. My dad will not touch the original money that is given to him to keep. If you numbered your money, you will get it back the same way. Basically, you will get the same notes you gave him to keep except he took the money to the bank

I learned this the hard way. A friend of a friend came with a need. He told me he had funds in the bank but it did not clear and the next day was a public holiday (this was pre-online banking). I loaned him money that someone gave me to keep. The person who gave me the money to keep, trusted me to the extent that he refused to sign a contract with me because he trusted me. I was supposed to get the money on the next working day, from the friend of a friend. Till today the next working day nefa reach. I had to go to the guy who gave me the money to keep for him, spoke a lot of English and paid back though I missed the day we earlier agreed. It was sad but I learned the hard way.

Avoid Impulse & Unplanned Expenses.

No budget, no spend. Spending without a budget is misappropriation. It doesn’t apply only to politicians. Have a budget & stay on it. This is the epitome of discipline. People will say what they want to say but instilling financial discipline is more important. A budget creates boundaries. Without a budget, you are on the speed lane to debt and debt…s/he is cruel. Plan plan plan. There might be surprises but a plan keeps you in order. It helps you know where you have detoured. You must not buy every AsoEbi. ATM cards are sweet to swipe but hard on the balance.

One of the ways to avoid impulse buying is to hold cash. Yes. It sounds not- so-tech in a tech age but believes me it works. When the cash is finished, it is finished. Sitting down in one place also helps. Yes o. The more the outing, the more the expense. I can feel the envy I am generating with this but na so e bi.

The Money Will Come.

You are old enough now to know that the money will not always come. Things happen. Have a buffer for emergencies. The difference between politicians & business people is that politicians do not understand why the money should not come. Business people work for money. They know that you have to make it happen. Stop planning your expense based on the generosity of strangers.

Spending Based On Other People’s Purse.

Don’t plan your wedding with the hope that your uncle will foot the bill. It is setting yourself up for frustration. Uncle also has his money issues that you have no clue about. Don’t plan to fly business class with the hope that someone else will pay. You are not on welfare. Even if you are on welfare, please bring something to the table. That something is humility.

Responsible people spend within their means. They may not have Rolexes or iPhones but they hardly ask for help on predictable things like house rent, school fees, etc. It takes 9 months to have a baby. It is not an emergency; plan for it. I take God beg you; plan.

Your kids should be in schools that you can afford. People have come to me for fees of school that my kids cannot even attend. I once headed a scholarship board and we set our requirements from day one. But parents kept coming for help in schools that they cannot afford. I mean households that both parents were not earning any income. Do you see what I mean by the fact that you have to contribute humility when you come to the welfare board?

Don’t buy with the hope that someone else will pick the bill. Try and agree on upfront for a joint transaction. The fact that someone paid upfront might mean that s/he expects repayment. Don’t think s/he is wicked when repayment is expected and asked for. In joint transactions, always think of going Dutch except you are advised otherwise. Err on the side of caution.

Spending Money Before It Gets To You.

Things happen. Until money enters your account, don’t go & pick something with the hope that you will pay when you get the money. That habit will lead you into the red. How about if that money does not come at the end of the day? I try not to make promises to people based on expected money. I see people start piling up debt just because they got a new job. It will distort your balance sheet if you start that way. It never ends well.

Money Sent Me On Errand.

I have seen people who were given a raise, upgrade their lifestyle in a heartbeat. Fly business class the next day. Buy an expensive toy they never planned for. This is what happens to lottery winners. They pursue the appearance of wealth. The appearance of wealth is demonstrated when you get those things that make it look like you’ve arrived. It is the reason people take pictures sitting on cars; the same reason musicians record videos in mansions and nice cars and private jets. Gang stars wear fur coats. Same when people buy TV/stereo set/gadgets with their first salary. Always allow the money to cool down. Take out time to plan what to do afterward. I have a one month rule for windfalls. They stay in the account until such a time that I have decided the way forward.

Depending on the Generosity of Strangers.

This is living life with the hope that somehow someone else will show up in the nick of time to pick your bills. It leads to living in debt and hoping that those you are indebted to will forget the money. These people can come to you with their family to thank you for the debt forgiveness you have rendered them. Meanwhile, you have said nothing of such. They always convert their debt into forgiven loans by themselves without your consent. They are experts at this. They quarrel and get contentious if you do not forgive. Money problems abound.

So, next time you think of doing any of these, have a rethink.

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