MSAF 606

TAXES & BUSINESS STRATEGY

Lesson 4 – Taxation of Employment Income

College of Humanities
University of Ghana Business School
Department of Accounting
 Session  Overview  

Lesson Objectives:
§ By the end of this session you should be able to
• Understand the various sources of employment income
• Explain the benefits in kinds
• Compute the chargeable income and the tax thereon from
employment
 Session Outline
§ The key topics to be covered in this session are as follows:
• Employment Income Defined
• Allowances paid in cash or given in kind
• Overtime and Bonus
• Personal Reliefs and Other Allowable Deductions
• Some other issues on Employment income
 Reading  List
§ Amidu, M. (2019), Principles and Practice of Taxation, First
Edition, Digibooks, Accra. Ghana Chapter 5, (pages 151-75)
§ Ali-Nakyea A. (2016), Taxation in Ghana-Principles, Practice
& Planning, Black Mask Ltd., 3rd Edition. Chapter 4, (pages
100-127)
§ Income Tax ACT, 2015 (ACT 896), Ghana Publishing
Company Limited, (Assembly Press), Accra, Ghana, Section 4
Fourth Schedule
 Topic  One

EMPLOYMENT  INCOME  DEFINED

Introduction
Employment Income Defined
§ Employment income (EI) is the amount of money that one
receives as a result of one working for a person or an
organization.
§ Section 4 defined EI as the gains or profits from employment
including allowances or benefits paid or given in kind to or on
behalf of an employee other than those specifically exempt.
§ For the purpose of this section the amount of allowance or
benefit is a gain or profit from the employment, if it is:
• provided by the employer, an associate of employer or a third party
under an arrangement of the employer.
• Provided to an employee or an associate of the employee
• Provided in respect of past, present or prospective employment.
 Introduction
Employment Income Defined
§ In summary one can say that employment income is income
derived from a contract of service. This includes:
• Salary, wages, leave pay, fees, commissions and gratuities
• Overtime pay and bonuses
• Personal allowances including cost of living allowance, subsistence,
rent, entertainment, or travel allowance
• Discharge or reimbursement to third parties, for example, payment of
ward’s school fees;
• Gift received in respect of an employment;
• The value of any benefits in kind provided either by/or on behalf of
the employer to the employee;
 Introduction
Employment Income Defined
§ The value of any benefits in kind provided either by/or on behalf of the
employer to the employee;
§ Retirement contribution made on behalf of the employee
§ Payments made in accordance to the conditions of employment,
example, Performance incentive.
§ Other allowances in-cash or in-kind
 Introduction
Employment Income Defined
§ However, there are exclusions to this employment income.
§ This includes all payments made to employees on non-
discriminatory basis which by the:
• size;
• type and frequency,
• Are impracticable to allocate to an individual;
• Accommodation provided on a timber, mining, building, construction,
farming or petroleum to an employee on site or field of operation; and
• Dental, medical and health insurance expenses of an employee where
this is available to all employees on an equal basis.
• The exclusion also includes: workman’s compensation, pension etc,
• Final withholding payment, passage cost, redundancy pay,
reimbursement of business expenditure.
 Employment  Income
Illustrations 4.1
Patapaa Ltd employed Nana Ama on 1 February 2012. Her
Consolidated salary was GH₵100,000 X GH5,000 - GH₵200,000.

Required:
Compute her basic salary for 2017 year of assessment.
 Employment  Income
Solution to Illustrations 4.1

Basis Period: 1/1/2017-31/12/2017

Consolidated basic salary GH₵ GH₵ GH₵
1/2/2012-31/1/2013 100,000
1/2/2013-31/1/2014 105,000
1/2/2014-31/1/2015 110,000
1/2/2015-31/1/2016 115,000
1/2/2016-31/1/2017 120,000 x1/12 10,000
1/2/2017-31/1/2018 125,000 x 11/12 114,583.33
Basic Salary for 2017 124,583.33
 Employment  Income
Motor  Van/Vehicle-­‐Vehicle  Element
• Where a benefit provided by an employer to an employee or an
entity to a member or manager consists of the use of or availability
for use of a motor van/vehicle wholely or partly for the private
purposes of the employee or the member or manager, the value of
the benefit is quantified according to the following (See Fourth
Schedule of Income Tax Act, 2015 (Act 896):
Employment Income
Vehicle Element
Benefit Rate
Driver and vehicle 12.5% of the total cash emoluments of the
with fuel person up to a maximum of GH¢600 per month

Vehicle with fuel 10% of the total cash emoluments of the person
up to a maximum of GH¢500 per month

Vehicle only 5% of the total cash emoluments of the person up

to a maximum of GH¢250 per month

Fuel only 5% of the total cash emoluments of the person up

to a maximum of GH¢250 per month
Slide  13
Employment Income
Rent Element
Benefit Rate
Accommodation with 10% of the total cash emolument of the
furnishing person

Accommodation only 7.5 % of the total cash emolument of the

person

Furnishing only 2.5% of the total cash emolument of the

person

Shared accommodation 2.5% of the total cash emolument of the

person
Slide  14
 Employment Income
Taxable Employment Income
Illustration 4.3
Mr. Yaw Danda has been employed as the Assistant Administrator of
Bob Limited on a basic salary of GH¢1,000.00 per month. In addition,
he is paid professional allowance of GH¢300.00 per month as well as a
risk allowance of GH¢200.00. He also enjoys responsibility allowance
of GH¢200.00 per month. Mr. Danda has been provided with furnished
accommodation and a saloon car by his employers. He contributes to
Social Security Fund.

You are required to determine Mr. Yaw Danda’s monthly taxable

employment income.
Employment Income
Taxable Employment Income
Solution to Illustrations 4.3
Computation Mr. Yaw Danda’s Monthly Taxable Employment Income
GH¢ GH¢
Basic salary 1,000
Add Allowances:
Professional allowance 300
Responsibility allowance 200
Risk allowances 200 700
Total Cash emoluments 1,700
Add: Rent Element (10x1,700) 170
Car element (5% x1,700) 85 255
Total qualifying employment income 1,955
Less SSF (5.5 x1,000) 55
Chargeable Income 1,900
Employment  Income
Loan  Benefits
§ It is not the duty and responsibility of an employer to provide loans to an
employee.
§ The loan benefit will not be quantified and that there will not be any tax
related issues under the following condition:
• The loan is from an employer to an employee
• The term of the loan does not exceed twelve months; and
• The aggregate amount of the loan and any similar loan outstanding at
any time during the previous twelve months does not exceed three
months basic salary.
§ The loan should be quantified as: a quarter (1/4) of the difference
between the interest payable at a statutory rate (BOG re-discount
rate) and actual interest paid on the loan, if the above condition is not
met.
Employment  Income
Loan  Benefits
§ Ama has been employed by All Bank limited. On 1st January 2016,
Ama took a car loan of GHS100,000.00 from his employer at a
concessionary interest rate of 10% per annum payable within 5 years.
§ What is the tax implication of Ama’s loan assuming that BoG policy
rate is 25% per annum?
 Illustration on loan benefits

Loan Benefits Bank Staff

Loan 100,000
Interest 10,000
Interest and Principal 110,000
Evaluation
Loan 100,000
Interest @ BoG policy rate 25,000
Total 125,000
Different 15,000
Additional income @25% 3,750.00
Employment Income
Bonuses and Overtime (summary)

Overtime (Only Qualifying Junior Employees) Rate

Overtime up to 50% of monthly basic salary 5% final tax

Overtime more than 50% of monthly basic salary 10% final tax

Overtime to other categories of employees Personal Tax

Rate

Bonus –All categories of employees Rate

Bonus up to 15% of annual basic salary 5% final tax

Bonus in excess of 15% of annual basic salary (the difference) Personal Tax Rate

A qualifying junior employee is a person whose employment income for a year of assessment does
the exceed eighteen thousand currency points
 Employment  Income
Bonuses  and  Overtime
Illustration 4.5
Joeman works with ACB Company limited and on an annual salary of
GH¢100,000. He was paid a bonus of GH¢14,000 in December, 2018.

Determine the tax on the bonus

 Employment Income
Bonuses and Overtime
Solution to Illustration 4.5
Annual basic salary = GH¢ 100,000
Annual bonus paid = GH¢ 14,000
Annual bonus as a percentage of annual basic salary
14,000 x 100 = 14%
100,000
Annual bonus paid is less than 15% of annual basic salary therefore the bonus of
GH¢14,000 will be taxed at a concession rate of 5%

Bonus tax = (GH¢ 14,000.00 x 5%) = GH¢700.

It must be noted that the bonus amount will not be included in ascertaining the
total cash emolument of the employee since the tax paid on the bonus is a final
withholding tax.
Employment Income
Personal Reliefs
§ A tax relief is a legally approved deductible allowance intended to
reduce a tax payer’s taxable income and thereby lessens the tax burden.
§ It is intended to cushion the effect of tax on the individual and to make
it bearable for him to pay the tax.
§ It is based on the individual’s circumstances and the equity principles.
§ This means that tax reliefs are concessions, provisions and conditions
made available to taxpayers.
§ They serve as:-
• motivation and encouragement;
• means of reducing the tax liability and also lessens the tax burden
on taxpayers
• and offers a certain level of respite,
 Personal  Reliefs
Type Limit Value (GH¢) 2016 Value (GH¢) 2020
Dependent Relief Spouse or at least two 200 1,200
children
Disability Relief Disability 25% of assessable 25% of assessable
income from business income from business
or employment or employment

Old Age Relief 60years and above 200 1,500

Children Education Maximum of 3children 200 per child 600 per Child
Aged-Dependent Maximum of 2 relatives 100 per relative 1,000 per relative
=>60yr
Education Relief Maximum of GHS400 Cost up to 400 2,000
retirement funds Based on Basic Salary 5.5% of basic salary

Slide  24
 Employment Income
Retirement Fund and Insurance
• The National Pensions Act 2008, (Act 766), provides among other
things that, employers are mandated to withhold 5.5% of the basic
salary of each employee and contribute 13% of each employee’s
salary towards the mandatory first and second tier pension
scheme.
• The total contribution of 18.5% is to split as follows:
• 13.5% is remitted to the first tier mandatory social security
scheme within 14 days after the end of each month to SSNIT;
and
• 5% is remitted to the second tier mandatory privately managed
pensions approved by the National Pension Authority.
Employment  Income
Payment  from  Retirement  Fund  and  Insurance
Note:
• Section 89 (1) and section 104 (1) of the National Pensions Act
2008, (Act 766), provides that the employer and employee
shall not pay income tax in respect of the contribution made
towards the retirement or pension scheme.
• This assertion is limited to the 35% threshold. (18.5% +
16.5%).
• Any contribution beyond the 35% is taxable.
 Employment Income
Withholding of Taxes by Employers
§ Regulation (L.I. 2244) among other things suggests that every employer
who is either resident or non-resident with permanent establishment shall
withhold taxes as prescribed by Act 896.
§ A non-resident public entertainer who renders a service in the country
shall, for tax purposes, be treated as an employee of the promoter of the
event in respect of which that public entertainer renders the service.
§ The Regulation further provides that the income of the public entertainer
shall be deemed as an income from employment and the income will be
computed accordingly.
§ The “public entertainer” is defined to include a stage artist, a motion
picture artist, a radio artist, a musician, a sportsman or sportswoman
including any athlete, footballer or boxer.
Employment Income
Casual and Temporary Workers
§ A final tax of 5% shall be withheld on the gross payment to casual
workers.
§ A casual worker is someone engaged on a work, which is seasonal
or intermittent, and for a continuous period of not more than six
months and whose remuneration is calculated daily.
§ A temporary worker on the hand is a person employed for a
continuous period of not less than one month and is not a
permanent worker or employed for a work that is seasonal in
nature .
§ The applicable tax shall be deducted as specified by Act 896 which
is either graduated rate or at a rate of 20% depending on the
residence of the person.
Employment Income
Employment Income Assessment Format
Name
Year of Assessment:
Basis Period:
GH¢ GH¢
Basic Salary XXX
Add: All Cash Allowances
Cost of living allowance XX
Subsistence allowance XX
Entertainment allowance XX
Travel allowance XX
Night duty allowance XX XXX
Employment Income
Employment Income Assessment Format
Add: Other cash benefits
Fees XX
Commission XX
Gratuities XX
Leave Pay XX
Overtime pay (Sect 4 & Reg. 5) XX
Excess Bonus (Sect 4 & Reg. 5) XX
A reimbursement of an expense incurred XX
A payment to condition of service XX
Other payments (including gifts received) XX
All other taxable benefits in cash/kind XX
•
 Employment  Income
Employment  Income  Assessment  Format
Indirect cash payments:
A retirement contribution XX
A discharge of an expense incurred XX
A payment made condition of service XX
Other personal liabilities paid by an employer: XX XXX
Total cash emoluments from employment XXXX
Add: non-cash benefits:
Car element XX
Rent element XX
Loan benefits XX
Utility bills etc. XX XXX
Qualifying employment income XXXX
Employment Income
Employment Income Assessment Format
Other non-cash benefits (sect 4 & 26) XXX
Assessable income from employment XXXX
Less: Reliefs (if applicable)
Marriage/responsibility XX
Disabled individual XX
Old age XX
Child education XX
Aged dependent relative XX
Cost of training XX XXX
XXXX
Employment Income
Employment Income Assessment Format
Other allowable deductions:
Social security contribution
(Sect 91, 93, 95, 96 & application of Act
766 National Pension Act, 2008) XX
Voluntary (provident fund) XX
Mortgage interest (Sch. 6(4 & 5) XX
Contributions and donations
to a worthwhile cause (Sect 100) XX XXXX
Chargeable income XXXX
Employment Income
Employment Income Assessment Format
Add: Other Income from abroad:
foreign country (Sect 103 & 111) XX
LESS: Foreign Tax Credit Allowable (Sect. 112) XX XXXX
Chargeable income from employment XXXX

Add other incomes (from business or investment) XXX

Total chargeable income XXXX
Tax thereon @ graduated rates (1st Schedule) XXX
Less: Tax paid on account XX
Tax credit (WHT) XX XXX
Tax outstanding (refund) XXXX
•
 Summary  and  Conclusions
• In this Lesson, we have explained the individual as a tax unit,
explained the difference between contract of service and
contract for services, listed and explained some benefits from
employment.

• Furthermore, we discussed the composition of emolument in

Ghana and outlined allowable and disallowable deductions
from employment income and then shown you how to
calculate bonus and overtime in computation of employment
income tax; and shown you how to compute taxes on
employment income.
 Discussion Questions and Problems

See Page 176 -200 for more discussion questions and problems