The Personal Income Tax is a direct tax levied on the income of an individual. It is usually deducted from the individual’s gross income or emolument to ascertain the disposable income of the individual.

The disposable income of an individual is the difference between an individual’s gross emolument and the tax paid by him or her. For example, if Mr. Iyke Okorafor earns N50,000 and pays N1500 as tax monthly, N48,500 is his disposable income. This, as we can see, is gotten by subtracting the tax paid by Mr. Iyke Okorafor from his income.

The Personal Income Tax is calculated on a graduated scale. The rates applied differ and change as an individual’s income move from one scale to the other scale. The scale is shown below:

First N300,000 7%
Next N300,000 11%
Next N500,000 15%
Next N500,000 19%
Next N1,600,000 21%
Above N3,200,000 24%

For instance, if Mr. Kunle’s taxable income is N300,000, Kunle is likely going to pay 7% of N300,000 as tax because he earns N300,000. Assuming he was earning more than that, we would have gone through a more complicating sequential mathematical process. But, before then, let us understand other concepts.

Basic Concepts of Personal Income Tax

Employees do not only receive basic salaries; they get other benefits. While some of these benefits are in cash, others are in kind. For example, some employees receive housing, clothing and transportation allowances. In kind, they receive cars, houses, etc.  When all these are added together, the gross emolument of an individual is obtained and properly taxed. Although, taxing does not begin with the gross emolument, it, as a matter of fact, begins with the taxable income.

The taxable income of an individual is the arithmetic difference between his gross emolument and the relief(s) enjoyed by the individual in question. The Personal Income Tax Act (PITA) makes provisions for deductions. The deductions provided are: Consolidated Relief Allowance, Child Allowance, etc. More so, deductions are allowed in the following areas: National Housing Fund Contribution, National Health Insurance Scheme, Life Assurance Scheme, National Pension Scheme, etc. Mindfully bringing this into book and carefully subtracting them from the gross emolument, provides us with the taxable income. The taxable income is then used to compute the Personal Income Tax.

The Consolidated Relief Allowance allows tax payers to enjoy 20% of gross emolument plus N200,000. Child Allowance allows N2500 for each child only to the maximum of four children provided that none of the children is above 16 years or married. However, a relief can be granted to a child over 16 years if he or she is in a recognized school, under artisanship or learning a trade.

The NHF Contribution allows 2.5% on the Basic Pay of the Tax Payer; the National Pension Scheme allows 8% for employees and 10% for employers.

You can contact us at PEFA Solutions to help you with your tax computations and filing of tax returns. We work closely with our clients throughout the year to ensure that our clients’ tax liabilities are minimized by capitalizing on less accentuated tax deductions specified in the Personal Income Tax Act and ensuring that revenues are maximized. Read more at www.pefasolutions.com/services

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