If you’re an employer or self-employed individual in Ghana, understanding employment tax is crucial for payroll preparation and compliance. This guide will provide a comprehensive overview of employment tax in Ghana, including key definitions, tax rates, deductions, and compliance requirements.
Before we dive into the specifics, it’s essential to touch on the broader context of payroll preparation in Ghana. Noohra Business Consult has recently published a comprehensive guide titled “Payroll Preparation in Ghana: A Comprehensive Guide“. This article covers various aspects of payroll management, from calculating employee salaries and deductions to understanding tax regulations and filing requirements. Our current focus, employment tax, is a critical component of the payroll preparation process.
Understanding Employment Tax in Ghana
Employment tax, also known as payroll tax, refers to the taxes that employers and employees must pay based on the income earned from employment. In Ghana, the primary employment tax is the Pay As You Earn (PAYE) system, which requires employers to deduct income tax from their employees’ salaries and remit it to the Ghana Revenue Authority (GRA).
Imposition of Income Tax
According to the Income Tax Act 2015 (Act 896), income tax is payable for each year of assessment by:
- A person who has chargeable income for the year.
- A person who receives a final withholding payment during the year.
The amount of income tax payable is the total of the amounts payable under the above conditions.
Chargeable Income
The chargeable income of a person for a year of assessment is the total assessable income from employment, business, or investment, less the total amount of deductions allowed under the Act.
Assessable Income
The assessable income of a person for a year of assessment is the income from any employment, business, or investment. For resident individuals, it includes income from all sources, whether or not the source has ceased. For non-residents, it includes income with a source in Ghana and income connected to a Ghanaian permanent establishment. Income from Employment
The income of an individual from employment for a year of assessment includes gains and profits from the employment for the year or part of the year. This includes salaries, wages, leave pay, fees, commissions, gratuities, overtime pay, bonuses, allowances, benefits, and other payments received in respect of the employment.
General Rules for Taxation of Income from Employment
- The income shall be the individual’s gains or profits from any employment for the year of assessment, including allowances paid in cash or given in kind.
- The basis period for computing income from employment is the period in which the income was earned within the calendar year (which is 1st January to 31st December).
- If employment commences on a date other than January 1, the basis period starts from the commencement date and ends on December 31 of the same year.
- Individuals account for employment income on a cash basis, and tax is calculated based on a twelve-month period ending on December 31 each year.
- No expenses are allowed under employment income apart from mortgage interest and contributions to worthwhile causes.
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Employment Tax in Ghana: A Comprehensive Guide
Employment Tax in Ghana: A Comprehensive Guide
Taxation of Benefits in Kind
Benefits in kind received from employment are subject to tax. These include accommodation, education of the employee’s children, goods or services provided free or at a lower cost, domestic servants, security, payment of utility bills, and share options. The value of the benefit is generally quantified according to the market value, as prescribed in the Fourth Schedule of the Act and relevant regulations.
Quantification of Loan Benefits
If an employer provides a loan to an employee, the loan benefit may be taxable depending on the loan’s term and amount. If the loan term exceeds twelve months and the aggregate amount exceeds three months’ basic salary, the taxable loan benefit is calculated as a quarter of the difference between the interest the employee pays (if any) and the interest that would have been paid using the statutory rate (Bank of Ghana’s Monetary Policy Rate) at the time the loan was taken.
Calculation of Income from Payment for Redundancy
Generally, lump sum payments made to an employee on termination of employment or redundancy are not taxable, as they are not in return for services rendered. However, payments related to the employee’s entitlements under the contract of service, such as payment in lieu of notice or leave, are taxable.
Treatment of Medical and Dental Benefits
Payment for dental, medical services, and health insurance provided to employees on a non-discriminatory basis is exempt from tax.
Employment Gifts
Gifts received in respect of employment, such as tips, awards, and appreciation payments, are taxable.
Personal Reliefs
The Income Tax Act 2015 provides for various personal reliefs that individuals can claim, including dependant spouse or children relief, disability relief, old age relief, child education relief, and aged dependant relative relief. Specific conditions apply for each type of relief.
Upfront Reliefs
Employees who satisfy the necessary conditions can apply for certain reliefs to be granted upfront on a monthly basis, including dependant spouse or children relief, child education relief (for up to three children), disability relief, and aged relief.
Payment for Passage and Provision of Accommodation
Payments made to an individual for passage to or from the country in respect of first employment or termination of employment are exempt from tax. However, if the payment covers family members, the amount will be treated as a taxable benefit.
Provision of accommodation by an employer carrying on specific operations (e.g., timber, mining, construction) to employees at the field operation site is exempt from tax. However, cash payments for rent or accommodation are taxable.
Payment to Employees on a Non-Discriminatory Basis
Payments made to employees on a non-discriminatory basis, which are unreasonable or administratively impracticable for the employer to account for or allocate to individuals, are exempt from tax. Examples include free or subsidized meals, mobile phone usage, bus services, staff parties, recreational facilities, counseling services, health screening, and parking facilities.
Pay As You Earn (PAYE)
PAYE is a tax deducted from an employee’s income and paid by the employer on the employee’s behalf. The tax is charged on all income, whether received in cash or in kind. Employers must file monthly PAYE returns on or before the 15th day of the following month.
PAYE Deductions and Allowances
Certain deductions and allowances are considered when calculating PAYE, including:
- Social Security and National Insurance Trust (SSNIT) contributions
- Mortgage interest
- Provident fund contributions
- Contributions and donations to worthwhile causes
Allowances such as transport, rent, risk, night duty, responsibility, child education, and other cash allowances are added to the salary for PAYE purposes. Benefits in kind, such as electricity, water, vehicles, and fuel, are quantified and added as well.
Overtime and Bonus Taxation
Overtime
The overtime rate is applicable to employees who are; Junior staff and their qualifying employment income including profits and gains to be taxed in the year is not more than Gh¢18,000. A junior staff whose qualifying employment emolument is more than Gh¢18,000 is not entitled to overtime pay.
When an employer pays overtime to any employee that is not more than 50% of the employee’s monthly basic salary, the employer will deduct 5% as overtime tax. However, if the overtime paid is more than 50% of the employee’s monthly basic salary, the excess of the 50% is taxed at 10%. Unlike bonus no overtime is added to basic salary. It should be noted that for a non- resident employee tax on bonus or overtime is 20%.
Bonus
Total bonus payments made by employers to their employees in a year of assessment are taxed at 5% up to 15% of the annual basic salary of the employee.
Where the bonus payment exceeds 15%, the excess will be added to the employment income of the employee and taxed at the graduated tax rate.
PAYE for Temporary and Casual Workers
Temporary workers (employed for a continuous period of at least one month) are taxed using the graduated rate, while casual workers (employed for seasonal or intermittent work) are subject to a 5% deduction on their daily remuneration.
Tax Rates and Bands
The following table details the monthly and annual income tax bands and rates applicable to the chargeable income of resident individuals:
Annual Tax Rate 2024
| No. | Chargeable Income | Rate of Tax |
|---|---|---|
| 1 | First GH¢5,880 | Nil |
| 2 | Next GH¢1,320 | 5% |
| 3 | Next GH¢1,560 | 10% |
| 4 | Next GH¢38,000 | 17.5% |
| 5 | Next GH¢192,000 | 25% |
| 6 | Next GH¢366,240 | 30% |
| 7 | Exceeding GH¢600,000 | 35% |
Monthly Tax Rate 2024
| No. | Chargeable Income | Rate of Tax |
|---|---|---|
| 1 | First GH¢490 | Nil |
| 2 | Next GH¢110 | 5% |
| 3 | Next GH¢130 | 10% |
| 4 | Next GH¢3,167 | 17.5% |
| 5 | Next GH¢16,000 | 25% |
| 6 | Next GH¢30,520 | 30% |
| 7 | Exceeding GH¢50,000 | 35% |
This comprehensive guide on employment tax in Ghana covers the essential aspects of payroll preparation, tax deductions, and compliance requirements. By understanding these regulations and guidelines, employers and self-employed individuals can ensure accurate tax calculations, timely filings, and avoid potential penalties from the Ghana Revenue Authority.
For more detailed information and guidance, refer to the Income Tax Act 2015 (Act 896) and other relevant tax regulations. Additionally, consider seeking professional advice from tax consultants or experts like Noohra Business Consult to ensure full compliance with Ghana’s employment tax laws and regulations.
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What are the current employment tax rates in Ghana?
In Ghana, employment tax rates are structured based on the individual’s income bracket. The tax system operates on a progressive scale, meaning that the more an individual earns, the higher the percentage of tax they pay. As of the current tax year, the rates range from nil to 35%, depending on the individual’s chargeable income. For instance, the first GH¢5,880 of chargeable income is taxed at a rate of nil, while the portion exceeding GH¢600,000 is taxed at 35%.
How does Ghana’s employment tax system work?
Ghana’s employment tax system, known as the Pay As You Earn (PAYE) system, mandates that taxes are deducted directly from an employee’s income by their employer. This ensures that taxes are collected efficiently and consistently throughout the year. The amount deducted is based on the individual’s earnings and is calculated using monthly graduated tax rates provided by the Ghana Revenue Authority. Various deductions and allowances, such as Social Security and National Insurance Trust (SSNIT), mortgage interest, and contributions to provident funds, are considered before calculating the final tax liability.
Are there any exemptions or incentives for employment taxes in Ghana?
Yes, Ghana’s tax laws provide certain exemptions and incentives aimed at reducing the tax burden for employees. These include personal reliefs such as dependant spouse or dependent children relief, disability relief, old age relief, child education relief, aged dependant relative relief, and cost of training relief. Additionally, upfront reliefs may be granted on a monthly basis for qualifying individuals. Furthermore, certain benefits in kind, such as transportation allowances and accommodation provided by the employer, may be subject to tax exemptions if they meet specific criteria outlined by the tax authorities.
What are the penalties for non-compliance with employment tax regulations in Ghana?
Non-compliance with employment tax regulations in Ghana can result in severe penalties for businesses and individuals. The Ghana Revenue Authority (GRA) is responsible for enforcing tax laws and ensuring compliance across the board. Penalties for non-compliance may include fines, interest on unpaid taxes, and even legal action in extreme cases.
One of the primary penalties for non-compliance is the imposition of interest on unpaid taxes. The GRA charges interest on any outstanding tax liabilities, calculated from the due date of payment until the date of settlement. This interest accrues daily and can significantly increase the amount owed over time.
Additionally, businesses and individuals found to be in breach of employment tax regulations may face financial penalties. These penalties can vary depending on the severity of the violation and may be imposed in addition to any outstanding tax liabilities. Repeat offenders or those engaged in deliberate tax evasion may face more severe penalties, including criminal prosecution.
In cases of serious non-compliance or suspected fraud, the GRA has the authority to initiate legal proceedings against the responsible parties. This can result in criminal charges, court appearances, and potentially imprisonment for those found guilty of tax-related offenses.
To avoid these penalties, it’s essential for businesses and individuals to stay informed about their tax obligations, maintain accurate records, and file returns in a timely manner. Seeking professional advice from tax experts or consultants can also help ensure compliance and mitigate the risk of non-compliance penalties.
How can businesses calculate and report their employment taxes in Ghana?
Calculating and reporting employment taxes in Ghana requires careful attention to detail and adherence to specific guidelines set forth by the GRA. Here’s a step-by-step guide to help businesses navigate the process:
Determine Taxable Income: The first step in calculating employment taxes is to determine the taxable income of employees. This includes salaries, wages, bonuses, allowances, and any other forms of compensation received during the tax year.
Calculate Pay As You Earn (PAYE): Once taxable income is determined, businesses must calculate the PAYE owed by each employee. This can be done using the graduated tax rates provided by the GRA, taking into account any deductions or allowances applicable to the employee.
Deduct Social Security Contributions: Employers are also responsible for deducting social security contributions from employee salaries at a rate of 5.5%. These contributions are paid to the Social Security and National Insurance Trust (SSNIT) on behalf of employees.
File Monthly Returns: Employers are required to file monthly PAYE returns with the GRA on or before the fifteenth day of the following month. These returns should include details of income paid to employees, taxes deducted, and any other relevant information.
Remit Taxes to the GRA: Once returns are filed, employers must remit the PAYE taxes withheld from employees’ salaries to the GRA. This should be done within the specified timeframe to avoid penalties for late payment.
Maintain Records: It’s crucial for businesses to maintain accurate records of income, taxes withheld, and PAYE returns filed. These records may be subject to review by the GRA and can help demonstrate compliance in the event of an audit or inquiry.