Hypothecated Taxes

Ten lines to get from gross to net pay is too much for Nigeria

Something that has not really been discussed is the kind of impact Nigeria’s new health insurance law will have on the shape of taxes in Nigeria. The National Health Insurance Authority Act became law in 2022 and will have a visible impact on the payslips of Nigerians employed formally.

This year the operational guidelines for the act have been published by the NHIA. It’s a very long document (we will have a guest post on the full document soon, hopefully) so will just focus on two parts. First, who does it apply to:

Straightforward enough. Now to the important part:

I have no sensible explanation for why government workers will contribute only 5% of their salary while private sector workers will pay 15%. Will government workers consume a lower amount of healthcare? Or are they less likely to fall ill? It is truly bizarre to determine healthcare contribution dependent on who your employer is.

But that’s not the main point of this post. I should first say that in principle I am not at all opposed to a contributory health insurance scheme. I work in the insurance industry and I will be the first to tell you of the power of insurance to aggregate funds in a way that makes previously impossible things possible. This new insurance scheme is projected to raise N500 billion annually for the health industry so it’s not to be sniffed at, at all.

But the new insurance levy is not happening in isolation. It is additive to whatever already exists so the pay slip of a Nigerian employee will now look something like this going forward:

National Housing Fund - 2.5% (Paid by employee)

Pensions - 18% (Employer pays 10%, employee pays 8%)

National Social Insurance Trust Fund (NSITF) - 1% (Paid by employee)

Health Insurance - 15% (Employer pays 10%, employee pays 5%)

Income Tax - up to 24% depending on how much you earn

Taxes and social security will now take up about 50% of an employee’s gross pay. Make no mistake, whether it is paid by the employee or employer, it is the employee who pays. This means that the cost of hiring an employee formally has increased significantly.

11 years ago, I wrote a piece about how Nigeria’s income tax structure was too complicated for the country’s level of development. Yet that is a different problem from the habit of hypothecation - where specific taxes are collected for specific purposes - that Nigeria seems to like. In theory, they seem to make sense and are easy to understand - a health tax to fund healthcare, a road tax to fund road construction and so on. But in practice things never quite work out that way. No serious person in the UK, for instance, believes that National Insurance deductions from their pay is what funds the NHS. Money is fungible and politicians have a habit of ‘borrowing’ money meant for one thing to pay for something else.

Even worse is how unwieldy things can get. There are 6 income tax bands in Nigeria and when you add these 4 social security deductions, you can end up with a ridiculous situation where someone who earns, say, N10 million, will go through 10 lines of calculations just to get to how their net pay has been calculated. There is no good reason why Nigeria should have a payslip that can run to 2 pages. It would have been sensible to get rid of the NSITF levy as a standalone deduction and roll it into the health insurance deduction. The NHF is a nuisance that has overstayed its welcome and can be removed. But this is Nigeria we are talking about and no one ever gives up a guaranteed funding line without a fight.

Finally, it is sobering how narrowly things like these apply. In August, when the NBS published its labour force survey, it included this startling finding:

The rate of informal employment among the employed Nigerians was 93.5% in Q4 2022 and 92.6% in Q1 2023

In other words, all these costs and taxes really only apply to less than 10% of workers in Nigeria. Given that the cost of employing a worker (and the cost of compliance) has just gone up with the new health insurance contribution, what do you think is going to happen to that informal employment percentage?

Exactly.