Emeka’s Gross Income (GI) is Fifty Million Naira (50,000,000). He is also not entitled to any non- taxable deductions. He wants to know from Enny Money what his Taxable Income is and amount of personal income tax is payable.
So, the first thing is to note is that Emeka’s gross income (aka chargeable income) is the addition of his income from all sources. All of this Emeka’s gross income will not however be taxed. The law gives him allowance to remove some monies from his gross income and these monies removed will not be taxed.
This automatically reduces the amount of tax Emeka will pay in the end because if I have 5 oranges and I’m supposed to pay the taxman half of each orange, I will end up paying the taxman 2 and a half oranges, but if the law says okay remove two of these your 5 oranges and keep it in your pocket, give the taxman half of the three remaining, I will end up paying the taxman 1 and a half oranges which is way lesser than the two and half I would have ordinarily paid, had the law not been so kind. So these allowances are the law’s way of giving people less dangerous heart attacks.
The Sixth Schedule of the Personal Income Tax Act generally provides how to calculate Personal Income Tax. Learn with me.
1. FIRST STEP – CALCULATE CONSOLIDATED RELIEF ALLOWANCE
Remember I said the law gives you allowances which you take out from gross income which will reduce the amount you finally pay as tax. CRA is the major allowance. The formula goes thus:
CRA = [N200,000 or 1% x GI]- whichever is higher + [ 20% of GI]
Remember that Emeka’s Gross Income is 50 million naira. 1% of GI is 500,000. So, it becomes:
CRA = [N 200,000 or N500,000]- 500,000 is higher, + [N10,000,000]
CRA = N 500,000 + N10,000,000
CRA = N10,500,000.
2. SECOND STEP – REMOVE NON-TAXABLE DEDUCTIONS
In the same spirit of allowances, income you get which falls under any of these categories will be removed from GI to reduce your final tax.
The Personal Income Tax Act provides that monies falling under the following are tax exempt:
i. National Housing Fund Contribution
ii. National Health Insurance Scheme
iii. Life Assurance Premium
iv. National Pension Scheme
Remember that none of Emeka’s income falls under these allowable deductions, so the second step doesn’t apply to him.
3. THIRD STEP – DEDUCT CRA AND INCOME WHICH FALLS UNDER STEP TWO FROM GROSS INCOME
Remember that you reduce your gross income by taking out allowances the law provides so that you pay lesser taxes. We don’t have any figures under step 2 so we are only deducting CRA from GI. This will give you Taxable Income which is the income that personal income tax rate will apply to.
GI – CRA = Taxable Income.
N50,000,000 – N10,500,000 = N39,500,000.
Emeka’s Taxable Income is N39,500,000.
4. FOURTH STEP – APPLY PERSONAL INCOME TAX RATES TO TAXABLE INCOME
Taxable Income is N39,500,000. The rates listed in the Sixth Schedule of PITA are then applied to the taxable income to get the tax payable.
First N300,000 = 7/100 x 300,000 = N21,000
Next N300,000 = 11/100 x 300,000 = N33,000
Next N500,000 = 15/100 x 500,000 = N75,000
Next N500,000 = 19/100 x 500,000 = N95,000
Next N1,600,000 = 21/100 x 1,600,000 = N336,000
Over N3,200,000 = 24/100 x (Taxable Income – N3,200,000)
= 24/100 x (N39,500,000 – N3,200,000)
= 24/100 x N36,300,000
5. FIFTH STEP – ADD RESULTS FROM ALL RATES TOGETHER TO GET TAX PAYABLE
N21,000 + N33,000 + N75,000 + N95,000 + N336,000 + N8,712,000
The amount of tax Emeka is to pay from his Gross Income of N50,000,000 is N9,272,000.
Eniola Akinoso is the initiator of the TaxVille and an associate with the Tax Department at Olaniwun Ajayi LP. She is passionate about Tax.