May 16 / Upturn

How to arrive at Chargeable Income

If you didn't know, there are three types of grosses represented on the payroll. Usually, the "gross" that most people are familiar with is the gross salary right before deductions. But there are two more types of "grosses" that you should know about.

Let's discuss what they are, and how to calculate them:
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From the top, we have:
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1. Negotiated gross salary
This is the original amount that an employee negotiates with an employer. It is the total, overall gross salary on which nothing has been deducted. It includes a salary breakdown of Basic salary (B), Housing allowance (H), Transport allowance (T), and any other allowance that a company would like to offer their staff. This means that a percentage of your negotiated gross salary goes as Basic salary, Housing Allowance, Transport Allowance (the three of which are statutory, by the way), and any other allowance that your company is offering; for example, wardrobe allowance, or meal allowance. No matter what constitutes your negotiated gross salary, it must all add up to 100%. So the formula would look something like this:

Negotiated Gross Salary

Basic Salary + Housing Allowance + Transport Allowance (BHT) + Any other allowance
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2. gross income
The first deductions to be made from an employee's negotiated Gross Salary are the deduction of tax-exempts. According to PITA, 2011, there are 5 tax exempts, and what's left after the deduction of these tax exempts is the employee's Gross Income. However, out of the 5 tax exempts, only 2 are deducted from the employee's (negotiated) Gross Salary, while the remaining 3 are the employer's obligations paid on the employee's behalf.

These 2 exempts that are deducted from the employee's Gross Salary are the Employee Pension and National Housing Fund (NHF). Now, once these are deducted, the employee is left with the Gross Income, on which CRA is calculated. Consolidated Relief Allowance (CRA) is the amount that is allowed by law to be set aside before tax is deducted from the rest.

Gross Income

Negotiated Gross Salary - Employee Pension - NHF
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3. chargeable income
Once the employee pension and NHF have been deducted, what you have left is the taxable gross income. However, the law according to PITA 2011 has mandated that a consolidated relief allowance should be removed first before the rest is taxed. And so, after deducting tax exempts to arrive at Gross Income, the CRA is then deducted from that to arrive at Chargeable Income. Just as the name implies, it is the income on which tax is charged (and by tax we mean the Pay As You Earn [P.A.Y.E] tax) which according to law, is the last thing to be deducted.

Chargeable Income

Gross Income - Consolidated Relief Allowance (CRA)
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Finally, know that once you deduct tax, what you are left with is an employee's Net Salary. Which is why net salary is usually depicted as "Gross Salary – Tax (P.A.Y.E)". However, you now know that there were a lot of "grosses" before this final 'gross' on which tax was calculated and deducted.

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