Interesting Facts about Payroll

Prior to the amendment of the Personal Income Tax Act of 2011, the consolidated relief allowance (CRA) was allowed to be deducted before the removal of tax exempts. This means that based on the new Act, tax exemption (which includes deductions of employee pension and national housing fund from the employee's negotiated gross salary) comes before  CRA is deducted to get the chargeable income on which tax is calculated.

What's interesting?
Because CRA is the part of an employee's gross income that is allowed by law to be non-taxable, the government initiated this amendment to reduce the relief allowance (which would have increased your net salary) and increase the taxes you pay to the government.

Don't tell them we told you. #wink

According to law, leave allowance in Nigeria means "allowable days" that an employee is entitled to after 12 months of continuous service in an organisation, with full pay. That means all employees are entitled to some days off with their full salary once they have worked a year at a company. And according to the Nigerian Labour Act, 2004, it's 6 days in a year. In practice, employers give anything from 12 – 24 days, which is way more than what the law stipulated.

What's interesting?
If you're an employee, this one might burst your bubble. The "allowance" in leave allowance does not refer to the additional money you get when you go on leave. That is actually not mandated by law, which means your employer is not obligated to give you that. Painful, I know.

Employers are only obligated to give their employees days off with full pay at the end of the month; nothing extra. Employers who attach extra cash do so because it's part of company policy.

Coupled with the fact that the days off that are usually granted are more than 6 days in a year, why don't you thank your employer?

Prior to May 2022 this year, the law according to Section 16(1) of the National Health Insurance Scheme (NHIS) Act was that employers with a minimum of 10 staff were to register their employees with a healthcare services provider (HMO). Now, the new health insurance Act under the National Health Insurance Authority (NHIA), signed into law by President Buhari, requires that healthcare services be provided by employers to their employees under an HMO regardless of the number of staff. Health Maintenance Organisations (HMO) are in charge of providing healthcare coverage for employees registered under them by their employers. 

What's interesting?
The new law puts companies with less than 10 staff (who are usually, but not always, smaller organisations) under undue obligation and increases the total payroll cost to the employer. You could argue that all employees deserve to be covered by an HMO in Nigeria, but the truth is not all companies can afford to, especially when you weigh in all other obligations the employer has towards the employee like employer pension, life insurance, etc.

The official gazette for the new National Health Insurance Authority Act (formerly National Health Insurance Scheme) is not out yet as it was just recently passed into law, and so we don't have the full gist. But when we do, you'll hear it here first.

True Cost or Total Payroll Cost to Employer is the total cost of the employee to the employer. It includes all monies paid by the employer directly to the employee or on their behalf. These include the employee's negotiated gross salary, employer pension, group life insurance, contributions to the National Social Insurance Trust Fund (NSITF), contributions to the Industrial Training Fund (ITF), Leave (monetary) allowance, and the recently mandatory HMO.

What's interesting?
Usually, when an employee negotiates a salary with a potential employer, they are just thinking about either the gross (total salary) or the net (how much is entering their bank account at the end of the month). In reality, the amount that leaves the employer's pocket to theirs is way more than the negotiated amount because of all the indirect expenses the employer makes on the employee's behalf.

Let's compare the two first.

The conditions for minimum tax in Nigeria according to law is where an employee's chargeable income is zero, or where the tax payable on the chargeable income is less than 1% of the total income, then the employee is liable to pay 1% of their total income as tax. 

The law also says that anyone earning minimum wage (30,000/month) and lower is not liable to tax. So even if an employee earns 1 Naira on top of 30,000, they will be liable to pay tax. The minimum tax rule has been made redundant, because for anyone to pay minimum tax, they would have to earn below the minimum wage of 30,000 monthly.

What's interesting?
The only way an employee would be liable to pay minimum tax would be if they were earning below the minimum wage. And according to law, that's impossible because once you earn minimum wage or below, you won't need to pay tax. Even at 30,001, an employee would still have a chargeable income on which tax can be levied. And when you compare the tax payable on this chargeable income, it's way more than 1% of total income (minimum tax) and that is what will serve as the employee's tax.

So the conditions for minimum tax (where chargeable income is zero, or where the tax payable on the chargeable income is less than 1% of total income) will never be met.

With these few points of ours, we would like to convince you and not to confuse you, that minimum tax in Nigeria is redundant under the new minimum wage Act.

Guess this one slipped through the cracks...

In conclusion...
We hope this was fun for you to read and informative as well. For us, it was quite interesting to discover the antics of the government when it came to the laws that guide payroll computation in Nigeria. Sometimes, these things... um, backfire.

Finally, it's one thing to have your payroll computation automated, but you should also remember to look out for updates in any Act or legislation that might affect your payroll.

Our (very exhaustive) Payroll course covers all we have discussed so far, and more. The Acts, the formulas, the interpretation in the Excel sheet, the payroll tax calculator, the monthly payroll, and how to transfer all this information to an employee's payslip has all been extensively explained. Because we're that nice, we also attached a free Payroll Excel template (with formulas embedded), along with the official Acts so you can take a look at them for yourself (you're welcome).

Click the button below to purchase our Payroll course at a giveaway price.