The Finance Act 2020: How It Affects Employment Tax and Payroll
Employee Engagement: How To Keep Up In The Second Half of The Year
July 1, 2021The Finance Bill 2020, also known as the Finance Act 2020 was signed into law on 31 December 2020 and it took effect on the 1st January 2021. The Act introduced over 80 amendments to the existing tax and regulatory legislation in Nigeria. It includes that of the Personal Income Tax Act (PITA).
In this article, we explained some of the major changes to Personal Income Tax Act and how these affect payroll.
1. Pension, Provident and Retirement Benefits Funds Contributions
Section 20(g) of PITA was amended to mandate that schemes to which pension, provident, and retirement benefits fund contributions are made, should be recognized under the Pension Reform Act (PRA).
This means that taxpayers, especially employers, must ensure that Schemes or Societies to which they make pension contributions are recognized by the Pension Reform Act.
Technically, any pension contribution made into a Scheme or society not recognized under PRA will not qualify for a tax deduction.
2. Redefining Gross Income
Subsection 2 of section 33 of PITA was amended as follows:
“For the purposes of this Section, “gross income” means income from all sources less all non-taxable income, income on which no further tax is payable, tax-exempt items listed in paragraph (2) of the Sixth Schedule and all allowable business expenses and capital allowances”.
Gross income is the framework for calculating the Consolidated Relief Allowance (CRA). The amendment implies that tax-exempt items should now be deducted from gross emolument before computing the CRA. The purpose of this amendment is to prevent a situation where non-taxable income and tax-exempt items are considered in CRA computation.
To this end, employees will no longer enjoy the additional 20% relief formerly claimable on the portion of their income that relates to pension contribution, National Housing Fund, and other tax-exempt items.
The amendment would have an impact on payroll as a result of an increase in tax rate.
3. Minimum Wage Earners’ Exemption from Tax
The Finance Act 2020 also introduced a condition to section 37 of PITA that says: “provided that minimum tax under this section or as provided for under the Sixth Schedule to this Act shall not apply to a person in any year of assessment where such a person earns the National Minimum Wage or less from an employment”.
Also, a new paragraph 33 was introduced to the Third Schedule of PITA which reads “the income of a person from an employment where such person earns a gross income of National Minimum Wage or less from such employment”.
The above means that any employee earning National Minimum Wage (currently ₦30,000 monthly) or less, is exempted from paying personal income tax.
4. Capital Gains Tax (CGT) Exemption Threshold of Compensation for Loss of Employment.
The Finance Act 2020 amended section 36(2) of the CGTA to clearly state the extent of exemption of any compensation for loss of employment from CGT.
The amended section now states “sums obtained by way of compensation for loss of office, up to a maximum of ₦10,000,000, shall not be chargeable gains and subject to tax under this Act. Provided that any sum in excess of ₦10,000,000 shall not be so exempt but the excess amount shall be chargeable to gains and subject to tax accordingly”
By the amendment, only payment above ₦10 million is chargeable to CGT at the rate of 10%. Any payment not up to 10 million is exempt from tax.
In addition, employers are now required to deduct the CGT on any compensation for loss of employment paid and remit to the relevant Tax Authority. This should be done on or before the 10th day of the month following the payment (the time specified in the PAYE regulations).
In conclusion, employers will need to carefully evaluate the impact of the amendments on their employees, update payroll/ tax systems, and communicate the impact of these new provisions with their employees.
