Methods of Assessing Personal Income-Pay-As-You-Earn(PAYE) System

P.A.Y.E. as an abbreviation relates to how an employee is assessed to taxation. The assessment is on actual year basis, but operates on monthly basis throughout the year. It can simply be defined as a scheme whereby tax on employees’ income is deducted at source by the employer and remitted to the relevant tax authority within 14 days after the end of the month.

3.4.1 Residence

A place of residence means somewhere available to an individual for his/her domestic use in Nigeria, on a relevant day (1st January), which excludes a hotel, rest house or other places at which he is temporarily lodging unless there is no other place available for his use on that day. The definition is contained in schedule 1 of PITA, 1993. Further, it may be necessary to determine a principal place of residence- where an individual resides in more than one place. Principal place of residence (not being both within the same territory) means:

  1. for an individual whose only earned income is pension- the place where he usually resides;
  2.  for an individual with earned income other than pension- the place nearest to his place of work;
  3. for an individual with unearned income- the place where he usually resides.

3.4.2 Operation of PAYE System

Employers can apply in writing to a tax authority signifying its intention to operate the scheme. On the other hand, local tax officials- in the course of the existence of a business in an area can bring the issue to the notice of the owners of the business. The relevant tax authority will then issue a notice authorising the employer to deduct tax (from source) from the employees’ salaries. Information normally demanded from the employer before registering the company as an operator of PAYE scheme includes the following:

  1. Name of the company/firm and its certificate of incorporation;
  2.  Number of employees and their names including other relevant information about them;

Furthermore, the registration process also involves the following:

  1.  Issuance of Registration number or Tax Identification Number (TIN);
  2.  Issuance of form G – a tax remittance card; form H1 – for giving details of annual returns; and form F3 – a tax deduction card for each employee after each person must have filled in the required income tax forms. This income tax forms can be filed directly by the employee or through his employer. In filling in the income tax form, employees are expected to be factual and state their basic salaries, all allowances due, marital status, number of children, number of dependant relatives and some other vital information;
  3. Tax authority computes the monthly tax liability of each employee after setting off reliefs against taxable income. The monthly tax liability is usually captured on form H1. However, tax tables are always available for the use of the tax authority, taxpayer and employer to ensure that the correct amount of tax is deducted and paid. Where there is any over or under deduction/payment of tax, the excess or shortfall is refunded or recovered.

3.4.3 Direct Assessment of Tax

The other method of collecting personal income tax is through direct assessment by tax officials. By direct assessment, we mean assessment of self employed persons who have one form of income- for example, subsistent farmers, roadside mechanics, vulcanizers, etc.