What are Payroll Deductions?

Payroll deductions are amounts withheld from an employee’s gross salary (total amount of money an employee earns before any deductions are made) by their employer. These deductions are either mandatory (required by law) or voluntary (authorized by the employee). After deductions, the remaining amount is the employee’s net pay (the amount they actually take home).

Types of Employee Payroll Deductions

Payroll taxes are governed by federal, state, and local laws in Nigeria and are calculated at specific rates. Every organization is responsible for these payments where necessary. Here’s a breakdown of each payroll deduction type and what it’s for:

1. Mandatory Deductions

These deductions are required by law and must be remitted to the appropriate government bodies. Some of the mandatory deductions include:

• Personal Income Tax (PIT): This is popularly known as Pay-As-You-Earn (PAYE). Employers are expected to withhold tax monthly based on the employee’s income and remit it to the State Internal Revenue Service (where the employee resides). Nigeria uses a graduated tax rate depending on income level (e.g., 7%, 11%, 15%, 19%, 21%, 24%). This means the higher the income level, the higher the tax to be paid on behalf of such employees. You can also refer to this for a clarification.
• Pension Contributions: Under the Pension Reform Act 2014 the expected minimum contributions from an employee is 8% of monthly emoluments (basic Salary + Housing Allowance + Transport Allowance or other defined allowances) while for an employer, it is 10% of monthly emoluments.
• National Housing Fund (NHF) Contribution: 2.5% of monthly basic salary is deducted and remitted to the Federal Mortgage Bank of Nigeria (FMBN). It gives employees access to housing loans.
• National Health Insurance Scheme (NHIS): Mostly for public sector employees. Private employers may offer private insurance instead. Some employers contribute to the NHIS for employees’ healthcare, though private health insurance schemes are now more common. The contribution structures vary based on scheme or insurance provider.
• Industrial Training Fund (ITF) Levy (Employer-based): This is not a direct employee deduction. It is when employers with 5+ employees or annual turnover of ₦50 million contribute 1% of annual payroll to ITF for employee training programs.
• Employee Compensation Scheme (ECS): Employer-only contribution (no direct deduction from employee salary) and it involves 1% of total monthly payroll paid to Nigeria Social Insurance Trust Fund (NSITF), covering workplace injuries and disability. 

2. Voluntary Deductions

They are optional deductions based on agreements between the employer and the employee:

• Pension Contributions: Employees can choose to save more than the 8% minimum 8% if they wish, usually to enhance retirement benefits.
• Cooperative Society Contributions: Contributions to staff cooperative societies for savings, loans, or investments.
• Union Dues: For employees who are members of trade unions (e.g., NLC unions).
• Loan Repayments: Deductions for repayment of salary advances or third-party loans (e.g., from banks).
• Private Health Insurance: Deductions for extra or private health insurance not covered by NHIS.

How Payroll Deductions Work (Step-by-Step)

1. Calculate Gross Salary: (Basic salary + allowances).
   
2. Deduct Pension and NHF Contributions:

• Pension: 8% of employee gross salary.
• NHF: 2.5% employee gross salary (if enrolled).

3. Calculate PAYE Tax: Use tax bands depending on an employee’s state to determine monthly tax.
   
4. Apply other deductions (loans, cooperative contributions).
   
5. Determine Net Pay:
   Net Pay = Gross salary – (Statutory + Voluntary deductions)
   

Payroll Deductions Example

Imagine an employee earns:

• Basic salary: ₦150,000
• Housing allowance: ₦50,000
• Transport allowance: ₦30,000

Total monthly emolument/Gross salary(the total of the above) = ₦230,000

Deductions:

• Pension: 8% of ₦230,000 = ₦18,400
• NHF: 2.5% of ₦150,000 (basic only) = ₦3,750
• PAYE: Calculated based on CRA (consolidated relief allowance) and taxable income after pension/NHF deductions.

Suppose PAYE is determined to be ₦10,000 for that month.

Other deductions:

• Cooperative savings: ₦5,000
• Loan repayment: ₦10,000

Net Salary = ₦230,000 – (₦18,400 + ₦3,750 + ₦10,000 + ₦5,000 + ₦10,000) = ₦182,850

Key Notes

1. Consolidated Relief Allowance (CRA) for PAYE Calculation:
   CRA = 20% of Gross Income + Higher of ₦200,000 or 1% of Gross Income. This reduces taxable income.
2. NHF Enforcement varies:
   Some sectors enforce NHF contributions strictly; others do not.
3. Private Sector Health Plans are now common over NHIS
4. PAYE Remittance Deadline: Employers must remit deductions to the relevant tax authority on or before the 10th day of the following month.
5. Pension Remittance Deadline: Employers must remit pension contributions within 7 working days of salary payment.