Understanding Payslip Calculations

Welcome to your comprehensive guide on understanding your payslip! This document will help you navigate through all the calculations and deductions shown on your payslip, making it easier for you to understand how your salary is calculated according to Nigerian tax regulations.

1. Gross Pay

Gross Pay is the total amount of money you earn before any deductions are made. It includes your basic salary, reimbursements, and other allowances.

Example:

• Basic Salary: ₦400,000

• Reimbursements: ₦50,000

• Other Allowances: ₦50,000

Calculation:

Gross Pay = Basic Salary + Reimbursements + Other Allowances
Gross Pay = ₦400,000 + ₦50,000 + ₦50,000 = ₦500,000

2. Statutory Deductions (Pre-CRA Calculation)

Before calculating your tax relief (CRA), certain statutory deductions are first subtracted from your gross pay as per Nigerian Finance Act 2020:

Pension Contribution (Employee)

• Rate: 8% of gross pay

• Example: ₦500,000 × 8% = ₦40,000

National Housing Fund (NHF) Contribution

• Rate: 2.5% of basic salary

• Requirement: Mandatory for employees earning ₦3,000+ annually

• Exemption: Expatriates are exempt

• Example: ₦400,000 × 2.5% = ₦10,000

National Health Insurance Scheme (NHIS) Contribution (Employee)

• Rate: 5% of basic salary (10% for employer)

• Federal Employees: 1.75% employee, 3.25% employer

• Example: ₦400,000 × 5% = ₦20,000

3. Consolidated Relief Allowance (CRA) - Enhanced Calculation

The CRA is a tax relief provided by the government to reduce your taxable income. According to the Nigerian Finance Act 2020, CRA is calculated on "adjusted gross income" (after deducting pension, NHF, and NHIS contributions).

Formula: CRA = Higher of Fixed Amount OR Variable Amount

• Fixed CRA: ₦200,000 annually

• Variable CRA: 21% of adjusted gross income (1% + 20%)

Example Calculation:

Gross Pay: ₦500,000
Less: Pension (8%): ₦40,000
Less: NHF (2.5% of basic): ₦10,000
Less: NHIS (5% of basic): ₦20,000
Adjusted Gross Income: ₦430,000

Annual Adjusted Gross: ₦430,000 × 12 = ₦5,160,000
Variable CRA: ₦5,160,000 × 21% = ₦1,083,600
Annual CRA = Higher of ₦200,000 and ₦1,083,600 = ₦1,083,600
Monthly CRA = ₦1,083,600 ÷ 12 = ₦90,300

4. Taxable Income (After CRA)

Your taxable income is calculated after applying the CRA relief:

Taxable Income = Adjusted Gross Income - CRA
Taxable Income = ₦430,000 - ₦90,300 = ₦339,700

5. Personal Income Tax (PIT) - Pay As You Earn (PAYE)

Important: Tax is calculated on annualized income, then prorated back to your pay period.

Nigerian Tax Brackets (Annual):

• First ₦300,000: 7%

• Next ₦300,000: 11%

• Next ₦500,000: 15%

• Next ₦500,000: 19%

• Next ₦1,600,000: 21%

• Above ₦3,200,000: 24%

Minimum Tax Rule: 1% of total income if calculated tax is lower

Example:

Annual Taxable Income: ₦339,700 × 12 = ₦4,076,400

Tax Calculation:
- First ₦300,000 @ 7% = ₦21,000
- Next ₦300,000 @ 11% = ₦33,000
- Next ₦500,000 @ 15% = ₦75,000
- Next ₦500,000 @ 19% = ₦95,000
- Next ₦1,600,000 @ 21% = ₦336,000
- Remaining ₦876,400 @ 24% = ₦210,336

Annual Tax = ₦770,336
Monthly Tax = ₦770,336 ÷ 12 = ₦64,195

Exemption: Employees earning below ₦70,000 annually are exempt from PAYE.

6. Employer Contributions (Not Deducted from Employee)

Pension Contribution (Employer)

• Rate: 10% of gross pay

• Example: ₦500,000 × 10% = ₦50,000

NHIS Contribution (Employer)

• Rate: 10% of basic salary (1.75% for federal employees)

• Example: ₦400,000 × 10% = ₦40,000

Industrial Training Fund (ITF)

• Rate: 1% of annual payroll (employer-only)

• Requirement: Companies with 5+ employees OR ₦50M+ annual turnover

• Refund: Up to 50% refund available for employee training

• Example: ₦500,000 × 12 × 1% ÷ 12 = ₦5,000/month

National Social Insurance Trust Fund (NSITF)

• Rate: 1% of monthly payroll (employer-only)

• Duration: First 2 years of employment

• Exemption: Armed Forces personnel

• Example: ₦500,000 × 1% = ₦5,000

7. Additional Deductions

Development Levy

• Type: Fixed annual fee for local development

• Rate: Typically ₦100 per year (₦8.33 per month)

Other Deductions

These may include:

• Union Dues: Typically 1% of gross pay

• Cooperative Contributions: Typically 5% of gross pay

• Charitable Donations: Typically 2% of gross pay

• Loan Repayments: As per loan agreement

8. Net Pay Calculation

Your Net Pay is the final amount you receive after all deductions:

Net Pay = Gross Pay - Total Employee Deductions

Important: Net pay is clamped to zero (never negative) if deductions exceed gross pay.

Enhanced Sample Payslip Breakdown

Employee Details:

• Basic Salary: ₦400,000

• Reimbursements: ₦50,000

• Other Allowances: ₦50,000

• Payment Frequency: Monthly

Earnings Section:

Basic Salary:           ₦400,000.00
Reimbursements:         ₦50,000.00
Other Allowances:       ₦50,000.00
─────────────────────────────────
Gross Pay:              ₦500,000.00

Tax Calculation Section:

Gross Pay:              ₦500,000.00
Less: Pension (8%):     ₦40,000.00
Less: NHF (2.5%):       ₦10,000.00
Less: NHIS (5%):        ₦20,000.00
─────────────────────────────────
Adjusted Gross:         ₦430,000.00
CRA Allowance:          ₦90,300.00
─────────────────────────────────
Taxable Income:         ₦339,700.00
PAYE Tax Withheld:      ₦64,195.00

Employee Deductions:

PAYE Tax:               ₦64,195.00
Pension (8%):           ₦40,000.00
NHF (2.5%):             ₦10,000.00
NHIS (5%):              ₦20,000.00
Development Levy:       ₦8.33
Union Dues (1%):        ₦5,000.00
Other Deductions:       ₦10,000.00
─────────────────────────────────
Total Deductions:       ₦149,203.33

Final Calculation:

Gross Pay:              ₦500,000.00
Total Deductions:       ₦149,203.33
─────────────────────────────────
Net Pay:                ₦350,796.67

Employer Contributions (Not Affecting Employee Net Pay):

Pension (10%):          ₦50,000.00
NHIS (10%):             ₦40,000.00
ITF (1% annual):        ₦5,000.00
NSITF (1%):             ₦5,000.00
─────────────────────────────────
Total Employer Cost:    ₦100,000.00

Key Changes in 2024/2025

✅ Enhanced Compliance Features:

1. CRA calculated on adjusted gross income (after pension/NHF/NHIS deductions)

2. Proper tax annualization - tax calculated on annual income, then prorated

3. Minimum tax rule - ensures 1% minimum tax on total income

4. Automatic exemptions - expatriates, armed forces, low earners

5. Precise rounding - all amounts rounded to 2 decimal places

6. Net pay protection - never shows negative take-home pay

📊 New Fields on Payslip:

• CRA Allowance: Shows your tax relief amount

• Taxable Income (After CRA): Shows what tax is calculated on

• Total Deductions: Summary of all employee deductions

• Enhanced PDF: Detailed tax calculation breakdown

Compliance Notes

• All calculations follow Nigerian Finance Act 2020

• Tax brackets are automatically updated for inflation

• Statutory contributions are calculated per FIRS guidelines

• Employer contributions are tracked separately for compliance reporting

Support

For questions about your payslip calculations or tax deductions, contact your HR department or reach out to [email protected]. Our system ensures full compliance with Nigerian tax regulations and provides detailed breakdowns for transparency.