On Payroll Computation in Nigeria. Please read if you have questions around salary breakdown.
After reading a lot of the comments on a payroll related post yesterday, I feel the need to correct a few inaccurate assertations I noted.
My concern is for those learning, so that we do not learn incorrectly and end up implementing poor practices in our workplaces or not understanding the reasoning behind the payroll computation.
To the best of my knowledge and experience, advising and managing payroll for businesses, there is no legally binding salary breakdown structure.
Total salary although explained in the Pension Act as total emoluments is described as comprising basic salary, housing and transport allowance, it is not a law on salary breakdown.
Infact, the Pension Act’s intention was to capture all of salary, instead, organisations have used this description of total emoluments as a loophole and now structure salary to always comprise the three elements of basic, housing and transport.
So, because pension contributions are computed as a % of basic, housing and transport allowances, adding other salary components, to salary decreases the amount of salary allocated to basic, housing and transport components, hence reducing pension contributions by both employee and employer.
So what is my point?
A company can decide to have only a basic salary and nothing else.
These breakdown of allowances often cited in offer letters in Nigeria are usually not necessary as they are not extra income or genuine allowances. They are simply used to structure payroll in a manner that ultimately reduces the pension contributions of both eployee and employer.
You may ask, why? Well, for the employee it increases their net pay and to the employer it reduces their pension costs. For a country with so much insecurity and short term mindedness, you may be able to understand the reasoning why firms pay for this service.
Most firms are already clear on their salary budget and the salary is all encompassing regardless of breakdown.
When an MD or HR team says my budget for a role is 300k, they aren’t thinking of any breakdown, it’s usually the entire salary they are referencing.
A lot of multinationals do not have these complex breakdowns. They know that 100k salary is 100k salary regardles of whether you break it down into 10 parts or not. When they want to give an allowance it is genuine and may be within salary or on top of salary e.g Travel allowance because they know you will be travelling quite a bit for your job and so it will be added to your package. One of our clients used to have travel allowance for only 2 staff, the MD and Business Development head. Some firms that have housing allowance are genuine sums which cover housing but truth be told majority just include it for the sake of it. I mean what is really housing allowance in a 100k salary?
A lot of the break downs were inherited by old tax laws which used to give tax allowances to certain salary components. However there was a major review in 2011 which consolidated all reliefs and allowances to a standard rate for everyone hence the break down serves no purpose aside reducing pension contribution amount by the employer.
Even at that, you might as well just have basic, housing, transport and any other allowance lumped into 1 as it’s of no consequence having any breakdown further than this.
All allowances are taxable hence there is nothing gained by calling it housing allowance or utility. It is still taxed the same even if it was called chocolate allowance.
Looks like many people need a payroll class.
My concern is not with those who genuinely don’t know but with those speaking authoritatively while their assertions are not exactly accurate.
We are all open to learn but please let’s be sure of what we are speaking about because of those learning amongst us.