Jun 17 / Upturn

Minimum Tax Myth Debunked!

 Minimum wage vs Minimum tax.

Minimum Tax:
According to Section 37, PITA 2011 (as amended), an employee is liable to pay minimum tax where the employee has no chargeable income, or where the tax payable on the chargeable income is less than 1% of total income. Minimum tax is given to be 1% of the employee's total income.

What this means in simpler English is that, if the employee's chargeable income is zero OR if after calculating an employee's chargeable income, and the tax payable on this chargeable income is lower than the 1% of their Total Income (their Negotiated Gross Salary), then they'll have to pay the 1% of their Negotiated Gross Salary as tax.
Minimum Wage:
The Nigerian Minimum Wage Act of 2019 gives the minimum wage of a Nigerian employee to be at 360,000 annual total income (30,000 per month).

Proviso of the Finance Act 2020 in PITA 2011:
The Finance Act 2020 included a proviso in Section 37 of PITA 2011, stating that anyone earning the minimum wage (30,000/month) or less is exempt from tax.

Taking the three stipulations above into consideration, we can deduce that any employee earning just 1 Naira above the minimum wage is liable to tax. The question then becomes, will such an employee pay the 1% minimum tax or the normal graduated tax that is levied on chargeable income? Remember, the only way that the employee will pay minimum tax (which is 1% of total income) is if they have no chargeable income, or if their tax payable is less than 1% of total income.

If we do the math, calculating all the way from the employee's negotiated gross salary to chargeable income, we will have this:
What can we deduce from this?
1. We can see that for an employee earning just 30,001 (360,012 annually), they still get a chargeable income. As such, the first clause of the minimum tax stipulation has been negated as we have just seen from the table above that just 1 Naira above the minimum wage still yields a chargeable income.

2. Going back to our question on whether this particular employee would pay the normal tax or 1% minimum tax, we can determine this if we compare the results of both to see whichever one is higher, as the law says that the higher one should be paid as tax. So, will it be 1% of total income (negotiated gross salary), or the graduated tax beginning with 7% of the first 300,000?

Let's find out what 1% of total income is: 1% x Negotiated Gross salary (360,012) = 3,600.12

Now let's check 7% of the first 300,000, which is supposed to be the first stage of graduated taxes.

If you recall, from the table, the chargeable income was 69,159.37, which is not up to, but within the first 300,000, and so we will tax that at 7%.

 7% x Chargeable Income (69,159.37) = 4,841.16

Looking at both figures side by side, we have the 4,841.16 to be higher, which means that this employee will not pay the 1% minimum tax, but will have 7% calculated on his chargeable income instead.

This happened with just 1 Naira added to the Minimum Wage. 

If 1 Naira above the minimum wage still yields a higher tax than 1% of total income, then it is safe to say that there will actually never be a situation, where minimum tax will ever be required.  So, in conclusion, you can see that minimum tax will never be applicable as currently stipulated in Section 37 of PITA 2011, because anybody earning above the minimum wage can never have 1% of their total income higher than the tax payable on their chargeable income.

This would only have happened at a much lower salary than 360,000 annual minimum wage. But remember, that according to law, anybody earning the minimum wage and below will not pay tax. So, although minimum tax is still in existence, it is actually redundant due to the minimum wage clause.

Do you want a way to calculate your taxes automatically? Then you will find our Payroll course useful. With it, you will learn a practical way to calculate your taxes on your payroll , as well as other useful skills for payroll computation. The course also comes with a free Payroll template embedded with a PAYE tax calculator that computes your graduated taxes, even sums them up, and deducts them from your gross income to arrive at your net salary! 

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