Detailed Guide to Statutory Contributions in Nigeria
Statutory contributions refer to the amount mandated by law to be made by both employers and employees, failure to make these payments before deadlines would incur fines and penalties.
An employee who makes these statutory contributions is eligible for the reduction in the gross income for computing the Consolidated Relief allowance. -At the same time, employers must deduct and remit different amounts to the relevant agency.
Below are the statutory contributions to be made by employees and employers in Nigeria. The first three items are deductions from the employee’s gross salary. The fourth is an employee and employer contribution, while the last two are employer contributions.
- National Housing Fund (NHF)
- National Health Insurance Scheme (NHIS)
- Personal Income tax (PIT)
- Pension Fund (PF)
- Industrial Training Fund (ITF)
- Nigeria Social Insurance Trust Fund (NSITF)
Statutory Contributions 1 — National Housing Fund
The NHF was established by Act 3 of 1992 (as amended) and the goal of this fund is to give loans to Nigerians for developing, buying, or renovating houses. In addition, people who contribute to the fund can get long-term loans from Mortgage Institutions.
The employer is also required to register an employee with NHF, deduct the NHF contribution at a 2.5% rate of the employee’s monthly basic salary, and remit it to the Federal Mortgage Bank of Nigeria (FMBN) within one month after the salary has been paid to the employee. Employers are liable to a penalty of 50,000 for late remittance.
Expats and employees with an annual income of below ₦3,000 and expatriates are exempt from making NHF contributions.
Statutory Contributions 2 — National Health Insurance Scheme
National Health Insurance Scheme is a body set up by Decree 35, of 1999 (now Act 35) operating as Public Private Partnership and directed at providing accessible, affordable, and qualitative healthcare for all Nigerians.
Participants of the NHIS scheme are to make contributions to be able to have access to health insurance.
An employer pays a fixed amount regularly monthly on behalf of the employee whether the contributor falls sick or not. However, whenever a contributor needs medical attention, the Health Maintenance Organisations (HMOs) pay from the pool of funds a large percentage of the cost of healthcare. NHIS also regulates private health Insurance operated by HMOs.
Every employer with at least ten employees is obligated to contribute to NHIS on behalf of all the employees. An employer will contribute 10% of the basic monthly salary of an employee while an employee contributes 5%, which is deducted from the employee’s salary.
The health care covers the contributor, the contributor’s spouse, and four biological children under 18. However, a contributor with greater than six family members can register the additional persons as dependent(s).
Statutory Contributions 3 — Personal Income Tax
Personal Income Tax involves the charge on the income of individuals, trustees, and executors. In Nigeria, the two key legislations are the Personal Income Tax Amendment Act 2011 and the Finance Act of 2020.
Employees pay tax based on residency. Hence, an employee will be a tax resident,
- If the employee works partially or fully in Nigeria,
- If the employer is in Nigeria OR,
- If the employer has a fixed base in Nigeria.
Also, according to PAYE, the taxes you pay go to the state of your residence. So, for example, if you reside in Oyo State and work in Lagos State, you will be required to pay your taxes to the Oyo State Government.
Before figuring out how much of your employees’ salary will have to be contributed as PIT, you’ll first calculate what part of the salary is considered taxable income. The taxable income is the employee’s total gross income less Relief and exemptions like;
- Pension fund (PF)
- National Housing Fund (NHF)
- National Health Insurance (NHI)
- Consolidated relief allowances -This is the higher of NGN200,000 per annum or 1% of annual gross income plus 20% of gross income (gross income equals gross emoluments minus all statutory reliefs stated above)
- Premium paid in the prior year for a life insurance policy of an employee.
Statutory Contributions 4 — Personal Income Tax Rates.
After calculating the Taxable income, you can now move to calculate the personal income Tax to be contributed by the employee. Nigeria adopts a Pay-As-You-Earn (PAYE) system to calculate employees’ income tax. Hence, it is called the PAYE tax.
This tax rate progresses from 7 percent to 24 percent of taxable income and ranges from ₦300,000 to above ₦3.2 million in a year.
Please see below the tax rates used to calculate the PAYE tax;
A minimum tax of 1 percent of gross income will apply where an individual has no taxable income or the PAYE tax is less than the minimum tax.
However, a low-income earner is exempt from minimum tax in Nigeria. This is because the Finance Act 2020 defines a low-income earner as someone earning the National Minimum Wage or less. Currently, the threshold in Nigeria stands at NGN30,000 per month or NGN360,000 per annum.
Furthermore, the due date for an employer to deduct the monthly PAYE from employees’ salary and remit it to the relevant authority is within ten (10) days of the next month. Employers are liable to penalty and interest for failure to remit and late remittance.
Statutory Contributions 5 — Pension Fund
This Pension Fund is a formal social protection scheme that caters to all employees working in a company. In Nigeria, the pension of employees is governed by the 2004 Pension Reform.
The Pension Reform Act established a scheme where the employer and employee contribute a minimum of 10% and 8%, respectively, of the employee’s monthly compensation. An employer can decide to bear the full responsibility of contributing the entire amount. In this case, the contribution should be at least 20% of the employee’s monthly pay.
Every employee is required to open a retirement savings account with an approved Pension Fund Administrator (PFA), and the employer must deduct and remit the employee’s and employer’s monthly contributions to the PFA. The due date for making pension contributions is seven working days after making salary payments and non-compliance will attract a penalty of at least 2% of the unpaid amount.
Statutory Contributions 6 — Industrial Training Fund
The Industrial Training Fund (ITF) is a parastatal of the Federal Government of Nigeria under the Ministry of Industry, Trade and Investment, established in 1971. The agency’s main objective is to promote and encourage the development and acquisition of industrial and commercial skills required in various industries in Nigeria. In addition, ITF aims to equip indigenous workers with adequate skills for economic development.
Every organization with at least 5 employees or an annual turnover of ₦50 million must contribute 1% of its annual payroll cost to the Industrial Training Fund. An employer can, however, claim a refund of up to 50% of the amount contributed; if employees received appropriate training.
Employers must register for ITF at the relevant zonal office and submit a complete set of ITF returns for all their employees. This includes the evidence of ITF payment, completed ITF form, copy of the audited financial statement, and cover letter. Filing an ITF return is within three months from the end of a given year. The penalty for late payment is an extra 5% of the unpaid sum.
Statutory Contributions 7 — Nigeria Social Insurance Trust Fund
The Employees’ Compensation Act (ECA) 2010 provides compensation for workers or their dependents in the event of death, injury, disease, or disability arising out of or during employment.
NSITF applies to every employer and employee in the public and private sectors. However, members of the Armed Forces of the Federal Republic of Nigeria are exempt from the Scheme. Employers will, therefore, contribute 1% of employees’ monthly payroll to the NSITF.
However, this contribution is not deducted from an employee’s monthly salary. Rather, it is a statutory contribution by an employer.
Payment is to be made by the employer before the 16th day of the succeeding month after salary payment. Employers are liable to a penalty of 10% for the late or un-remitted 1% monthly payroll.
