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What Are Statutory Deductions?

Finance, Statutory Deductions

A statutory body or statutory authority is a body set up by law (statute) that is authorized to execute certain legislation on behalf of the relevant country or state, sometimes by being authorized or delegated to set rules (for example, regulations or statutory instruments) in their field.

In Nigeria, what are statutory deductions? is not merely an observance exercise; it’s a blueprint for sustained growth.

As employers embark on this journey, they contribute to the investments of their businesses and the collective improvement of Nigeria’s vibrant and diverse economy.

For instance, take advantage of Workpay’s calculator, which ensures that you remit the right deductions every time.

However, maintaining employees in Nigeria requires a detailed understanding of what are statutory deductions, to ensure compliance with Nigerian laws.

The guide below provides comprehensive details of Nigerian statutory deductions. Most employees only concern themselves with their net income and rightly so, after all, it is the net income that an employee will take home.

However, it is pertinent for an employee to try to be careful and accurate about the other deductions. These deductions are usually statutory, and it implies that by law, organizations should remit the deductions to the rightful institutions.

It is relevant to also understand that being ignorant about these benefits in some of these statutory deductions might leave one on the losing end.

What are Statutory Deductions

_Alicja_, Pixabay

What are Statutory deductions? Statutory deductions in Nigeria are compulsory deductions from employees’ earnings or salaries as directed by law.

These deductions are required for funding specific government agendas, social security, and other statutory duties.

Statutory deductions in Nigeria serve different essential purposes for both employees and the government. They include:

1. Revenue Generation for Government:

Statutory deductions contribute to the government’s revenue. These funds are necessary for financing several government programs, public services, and infrastructure development.

2. Social Security and Welfare:

Deductions like stipend contributions contribute to employees’ social security and interest. These funds come with financial security, inexpensive housing, and healthcare benefits to workers.

3. Workplace Safety and Employee Compensation:

The Employee Compensation Act Fund ensures that there is a means to compensate workers who suffer from work-related injuries or death. This promotes safety in the workplace and also protects the financial well-being of workers.

4. Legal Compliance and Accountability:

Statutory deductions make sure that employers comply with relevant laws and regulations. They build a system of accountability, preventing tax evasion and other forms of non-compliance.

Statutory Salary Deductions

Statutory salary deductions are a classification of taxes that employers are directed to withhold from their employees’ salaries and pay to the government.

These taxes are established, particularly on a given worker’s earnings. As such, statutory salary deduction amounts may differ slightly from employee to employee.

As with other employment-related taxes, statutory salary deduction allocation is usually used to finance different government programs and benefits, such as social security and pension plans, national healthcare programs, and unemployment insurance.

How Statutory Salary Deductions Are Calculated.

While every country demands certain deductions be made from an employee’s salary, the regulations differ widely. Which is to say that there is usually some form of income tax every employee is required to pay as well as a contribution to social security.

1. Income Tax:

Income tax is figured out or calculated based on an employee’s gross (pre-tax) pay and subtracted from their salaries.

Income tax rate brackets and exemptions are quite different between countries. For immigrant workers, income tax rates may be significantly lower, which may serve as an encouragement for moving to and working in the country.

  • Social Security, Pensions, and Other Insurance Programs:

Several countries demand that employees contribute to a social security fund. The amount is generally based on a typical percentage specified by the local governing tax authority.

While employees cannot opt-out from taking part in statutory pension or social security schemes, in some countries, such as the UK, there is no statutory one for the employee, but the employer has to contribute.

The amount an employee delivers into social security or pension funds differs from country to country. For example, in Estonia, employees born after December 31, 1982, contribute an amount equal to 2% of their gross pay to a pension program. In Portugal, social security totals are equal to 11% of an employee’s gross pay.

Depending on the country or government, these taxes may be collected and restrained at certain amounts. In Croatia, for example, employees donate 20% of their gross earnings to pension agendas but the amount is restricted at €970 per month, up to €12,095 per year.

Employees are often mandated to pay tax contributions to help fund other social programs, including national healthcare, disability insurance, accident insurance, unemployment insurance, etc.

2. Local Taxes:

Some countries might establish more local or municipal taxes on employment income or other forms of taxation specific to special regions. These vary based on a number of factors and may be applicable to some areas of a country but not in others.

3. Expatriate Taxes and Tax Treaties:

For employees working across frontiers, tax rules could be difficult. Some countries have distinct tax regimes for expatriates or provide tax residency incentives to attract highly experienced workers.

Likewise, many countries have tax treaties set in place to avoid double taxation between a worker’s home country and where they reside for employment.

This will make it easier for employees working in multiple countries to decide where taxes should be paid and it will also often provide credits or exemptions to prevent double taxation.

Statutory Deductions in Nigeria

Workers who perform statutory duties in Nigeria qualify for a reduction in their gross income when adding up the Consolidated Relief Allowance.

The following outlines the statutory contributions that employees and employers must make in Nigeria:

1. National Housing Fund (NHF):

The NHF was originally founded by Act 3 of the 1992 NHF Act. The fund strives to provide Nigerians loans for renovating, developing, or buying houses. Regular contributors can obtain long-term loans from mortgage institutions.

All Nigerian workers may access the NHF scheme if they are 21 years old and if they earn a minimum of NGN3,000 annually. Employers must register employees with NHF and contribute 2.5% of their basic salary.

Employees must remit the amount one month after the payday.  Late remittances attract a penalty of NGN50,000.

2. National Health Insurance Scheme (NHIS):

The NHIS is another deduction in Nigeria. Its objective is to provide affordable healthcare for all Nigerians. Employers with at least ten employees should register their workers and contribute the amount each month.

Employers must contribute 10% of the basic monthly salary and deduct 5% of the worker’s salary towards this fund.

The health fund covers the worker’s spouse and four biological children under 18 years of age. If the worker has more than 6 family members, they may register the additional people as dependents.

3. Personal Income Tax (PITA):

Personal Income Tax is an income tax for individuals, trustees, and administrators. Nigeria’s primary legislation supervising this deduction is the Personal Income Tax Amendment Act of 2011 and the Finance Act of 2020. The tax penalty for employees is determined by their residence status, which is established if the employee:

Pension Fund:

The Pension Fund is a structured social security initiative that encircles all employees within a company. In Nigeria, employee pensions are handled by the 2004 Pension Reform.

Under the Pension Reform Act, the employee and employer contribute a minimum of 10% and 8% of the employee’s monthly dividend, respectively.

Alternatively, an employer might make the total contribution. In this case, the minimum should be 20% of the employee’s monthly pay.

Employees should open a retirement savings account with an approved Pension Fund Administrator, to which the employers remit the deductions. The deadline for paying the funds is seven working days after payday. Lack of adherence leads to a 2% penalty for the unpaid amount.

Industrial Training Fund (ITF):

The Industrial Training Fund (ITF) serves as a government parastatal within the Federal Government of Nigeria, falling under the Ministry of Industry, Trade, and Investment jurisdiction. The agency intends to stimulate and foster skill development in the industrial and commercial sectors.

The Industrial Training Fund (ITF) pertains to employers with a minimum of 5 employees and an annual turnover rate of NGN50 million. These employers must contribute 1% of their annual payroll to the Industrial Training Fund (ITF).

By supplying proper documentation as proof of this contribution, an employer becomes qualified for a refund, receiving 50% of the amount contributed.

Nigeria Social Insurance Trust Fund (NSITF):

The Nigerian Social Insurance Trust Fund (NSITF) pertains to all employers and employees across the public and private sectors. Members of the Armed Forces are exempt from the scheme.

As part of their responsibilities, employers must contribute 1% of their employees’ monthly payroll to the NSITF.

This contribution guarantees that a compensation fund is in place to assist workers or their dependents in the unfortunate possibility of work-related incidents or health issues.

Note that this deduction is not from an employee’s salary. Instead, it is a statutory contribution by an employer.

The deadline for the contribution is before the 16th day of the succeeding month after payday. Failure to contribute attracts a penalty of 10% of the unremitted amount.

Final Words

With this article, we now know what statutory deductions are. It is expected that this essay helps you, as a Nigerian employee, understand the reason behind the deductions you see or will later see on your payslip and, more importantly, how you can benefit from them.

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