Summary
In Nigeria, payroll compliance is a critical aspect of managing a business. It involves adhering to various regulatory requirements to ensure employers pay their employees accurately and on time while also meeting the government's statutory deductions obligations.
Our exploration delves into seven crucial payroll compliance areas, offering insights into the statutory provisions, processes, and best practices necessary for businesses to remain compliant.
Nigeria's economy is rapidly growing with a sizable and expanding workforce.
As a result, it is becoming increasingly popular for businesses to expand their operations into Nigeria. However, knowing the payroll system in Nigeria is essential before hiring employees.
Here is an overview of the seven most crucial payroll compliance and legal requirements in Nigeria:
7 Payroll Compliance and Legal Requirements in Nigeria
Registration and document
Employers must be aware of the essential registrations and papers required, such as Tax Identification Numbers (TIN) and PenCom registration, for compliant payroll management.
Minimum wage
Nigeria's current minimum salary for organisation employees is NGN 30,000 monthly. Employers must pay at least the minimum wage regardless of the employee's nationality or position to comply with the defined payroll in Nigeria
Pay frequency
Employers in Nigeria are required to pay their employees at least once per month. The most common pay periods are monthly, bi-weekly, and weekly.
Payroll taxes
Employers in Nigeria are required to deduct the following taxes from their employee's paychecks:
- Pay As You Earn (PAYE) Tax: PAYE tax is a graduated income tax that ranges from 7% to 24%, depending on the employee's income.
- National Housing Fund (NHF) Contribution: NHF contribution is a 2.5% deduction from the employee's salary used to fund the National Housing Fund.
- Pension contribution: Pension contribution is an 8% deduction from the employee's salary, which funds the employee's pension account.
- National Health Insurance Scheme: Employer contributions will total 10% of an employee's base monthly income, and employee contributions will total 5% of the person's pay.
Payroll records
Employers can effectively comply with Nigeria payroll laws by keeping detailed payroll records for each employee, including the employee's name, address, date of birth, nationality, job title, salary, and taxes deducted.
A firm must keep its payroll records for at least six years.
Employment contracts
Employment contracts in Nigeria must be in writing and must specify the following terms and conditions:
- The name and address of the employer and the employee
- The nature of the employment
- The salary and benefits of the employee
- The notice period required to terminate the contract
- Other relevant terms & conditions e.g working hours, holidays, and sick leave.
Keep up-to-date and seek expert advice
Another payroll compliance and legal requirement employers in Nigeria must be aware of is that employers must provide their employees with pay slips after each payroll run and remit their employees' taxes to the government on time.
How To Calculate and Withold PAYE Tax in Nigeria
While calculating payroll in Nigeria you must consider employees' PAYE tax rate. You have to understand their gross income, allowable deductions, and chargeable income.
Gross income is the total income before deducting any tax. Allowable deductions are expenses exempted from personal income tax in Nigeria. You can maximize allowable deductions and reduce taxable income by carefully planning your finances.
You calculate chargeable income by subtracting their allowable deductions from their gross income. The PAYE tax rate is then determined based on your chargeable income.
The chargeable income is the amount you will pay PAYE tax on.
The Nigerian government uses a tiered tax system to ensure that people with different incomes pay different tax amounts.
To calculate your employees' PAYE tax, multiply your taxable income using the relevant tax rate. The tax rate rises as their income increases, so people with higher earnings pay a higher percentage of their income in taxes.
For example, if an employee's income is 300,000 NGN or less, you will pay 7% in PAYE tax. If the income is between 300,000 NGN and 600,000 NGN, you will pay 7% on the first 300,000 NGN and 11% on the next 300,000 NGN, for a total of 54,000 NGN in PAYE tax.
The tax rate continues to increase as the income increases. If an income is over 3.2 million NGN, you will pay 24% on the amount over 3.2 million NGN.
See the table below:
| Taxable Income (Naira) | Tax Rates (%) | Tax Amount Payable (Naira) |
|---|---|---|
|
300,000 |
7 |
21,000 |
|
Next 300,000 |
11 |
33,000 |
|
500,000 |
15 |
75,000 |
|
Next 500,000 |
19 |
95,000 |
|
1,600,000 |
21 |
336,000 |
|
Over 3,200,000 |
24 |
393,600 |
How To Calculate and Remit Pension Contributions
Contributory Pension Accumulation (CPA) is the total amount of money contributed to employees’ Retirement Savings Account (RSA) throughout their working life. It is calculated based on their primary salary, housing, and transport allowance.
To calculate the CPA, you can use the following formula:
Employee Pension Contribution = (Basic Salary + Housing Allowance + Transport Allowance) - 8%
Employer Pension Contribution = (Basic Salary + Housing Allowance + Transport Allowance) - 10%
Total Pension Contribution = Employee Pension Contribution + Employer Pension Contribution.
Only the employee portion of the total contribution is on the employee's pay slip. Although you don't indicate your share on the employee’s paystub, you record it as the company’s cost for employee benefits.
In conclusion, the basic formula for calculating all contributions is 18% of the employees' Basic, Housing and Transportation (BHT) allowance.
How to Calculate and Remit NHF Contributions
Employees in Nigeria must contribute to the National Housing Fund (NHF) if their salary is at least NGN 30,000 (the national minimum wage).
The employer must withhold 2.5% of the employee's monthly salary, who must then send the money to the Federal Mortgage Bank of Nigeria within a month following the deduction.
Recently, employees in the private sector are no longer compelled to comply with this requirement and may opt to voluntarily donate the obligatory 2.5% of their monthly income to the NHF.
How To Calculate and Remit NHIS Contributions
Every employer with at least ten employees is subject to the National Health Insurance Scheme. The business will contribute 10% of the monthly basic wage, and the employee will make 5%.
The employee, spouse, and four biological children under 18 are all covered by the health insurance. Employees with more than six family members may list the extra people as dependents.
However, whenever an employee needs medical attention, the Health Maintenance Organisations (HMOs) pay a large percentage of healthcare from the pool of funds. NHIS also regulates private health Insurance operated by HMOs
Stress the need to consult with a local expert and stay current on these payroll compliance in Nigeria, partner with a local payroll provider like Workforce Africa, who can help you ensure compliance.
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