Jun 10 / Upturn

Understanding Salary Deductions

What should you expect as an employee?

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Not many employees know how much is taken out of their salary as statutory deductions. Some employees might know, but they don't know how much or the percentage that is taken out as deductions. Most are aware of things like tax and pension, but they don't know the rate of each or where it's remitted to.

Because most employees negotiate net salary at the point of hiring, all they're concerned about is how much is credited to their account at the end of the month. Coupled with the fact that some employers don't bother to break things down and be transparent with their staff, most employees are oblivious.

However, it is due diligence for an employee to know their total gross salary, how much is being deducted, and where it is remitted to.

In Nigeria, there are 3 main deductions that are made from an employee's salary, backed up by law – the Employee Pension, the National Housing Fund (NHF), and PAYE tax. These deductions also have statutory rates that inform deductions, and they are as follows:

For the Employee Pension, it is usually calculated at
8% of the employee's BHT, and is remitted to a licensed Pension Fund Custodian.

Note that BHT is the sum of Basic Salary, Housing Allowance, and Transportation Allowance, which are also statutory to be included in an employee's salary.

For the National Housing Fund (NHF), it is calculated at
2.5% of the Basic Salary (not the BHT this time), and is remitted to the Federal Mortgage Bank of Nigeria.

Note
: The deduction of the employee pension and the NHF is what gives the employee Gross Income (which is different from gross salary).

Tax is the last thing to be deducted from the employee's gross salary and is graduated at specific percentages as given by law, the sum of which is then deducted from the employee's gross income. These percentages are 7%, 11%, 15%, 19%, 21% and 24%. The deducted taxes are remitted to the state's Internal Revenue Service (IRS), which is the tax regulatory body, through any designated collecting bank. For example, in Lagos state, the tax regulatory body is the Lagos State Internal Revenue Service (LIRS).

Usually, in an employee's payslip, the sum of the graduated figures is what is usually given. The individual figures for each graduated percentage are left on the payroll sheet.

Companies that issue out payslips to their employees usually have the figures for employee pension, NHF and tax detailed, as well as any other deductions that the employee is liable to. While the pension, NHF and tax are statutory and mandated, the employee may be liable to further deductions as the occasion demands. For example, if the employee is to repay a loan they took from the company earlier, or they have to pay for the damage they caused to a company property, these figures will be deducted from the employee's salary.

However, these scenarios don't happen all the time, and the 3 statutory deductions are what you would usually find on an employee payslip.

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