Tax Insights on Tax Thursday

Tax Insight 1- Contributions to the Voluntary Pension Scheme (VC) are tax free, although the National Pension Commission (PENCOM) has recently issued a Circular to all Pension Fund Custodians (PFC) and Pension Fund Administrators (PFA) to, among other things, restrict withdrawals from the VC to only once in every 2 years, and to not more than 50% of incremental contributions at each time of such withdrawals. This directive will become effective from 1 December 2017.

Tax Insight 2- Some other deductible items under Pay-as-You-Earn (PAYE) include:

  • Contributions to pensions (employer and employee portions, including voluntary contributions);
  • Gratuities;
  • National housing fund contributions;
  • National health insurance schemes;
  • Life assurance premium;
  • Interest on mortgages taken for owner occupied houses;
  • Consolidated relief allowance of N200,000 plus 20% of gross income, subject to a minimum tax of 1% of gross income, whichever is higher;
  • Children and dependent relative allowances;

Tax Insight 3- When computing Pay-As-You-Earn (PAYE):

  • seek out the tax exempt/ deductible items of your payroll;
  • add them to the gross incomes of employees
  • calculate and deduct the personal allowances (20% of gross income) and other allowances
  • remove the exempt/ deductible items again, before applying the tax table
  • Adding these exempt/ deductible items to the gross incomes first will increase the gross incomes, ensure you claim the maximum personal allowances for your employees and thus reduce the taxes payable.

Tax Insight 4: Effective 1 January this year, 2017, when computing Employee Compensation Levy (ECA Levy, formerly NSITF Levy) at 1% of payroll cost, you are allowed to deduct the following from the payroll cost before applying the 1%.

  • Pension contributions (employer and employee portions, including voluntary contributions)
  • Bonuses – performance related payments (whether monthly, quarterly or yearly)
  • Overtime payments
  • Irregular one-off payments (e.g. driver’s allowances, medicals, 13th month salary, etc.)