The ABCs of Taxation: A Beginner's Guide to Complying with Payroll Regulations in Ghana

The ABCs of Taxation: A Beginner's Guide to Complying with Payroll Regulations in Ghana

As a beginner, understanding the taxation system in Ghana can be a daunting task. In this guide, we will cover the ABCs of taxation in Ghana, specifically related to payroll. We will discuss what taxes you need to pay, who is responsible for paying them, and how to comply with the regulations.

Taxation is a crucial aspect of any economy. In Ghana, the government generates revenue to finance its operations by imposing taxes on individuals, businesses, and other entities. The Ghana Revenue Authority (GRA) is responsible for collecting taxes, enforcing tax laws, and providing taxpayer services. The tax revenue collected is used to finance public services and infrastructure development, such as education, healthcare, and road construction.

As an employer in Ghana, you need to understand the different types of taxes that you are liable to pay. Below are the main types of payroll taxes in Ghana.

  • (Income Tax) Pay-As-You-Earn (PAYE): This is a tax that is taken out of the salaries or wages of employees. Employers are responsible for doing this and sending the tax to the Ghana Revenue Authority (GRA) for their employees. This must be done on or before the 15th day of the following month in which the deduction was made, and the payment should be made to the Ghana Revenue Authority (GRA).
  • Withholding Tax: This is a tax deducted at source by a withholding agent (a person registered to deduct or withhold tax) and paid to GRA. The withholding rates are different depending on the transaction or business activity involved. The tax is accounted for and remitted to GRA on or before the 15th day of the ensuing month after the month it was deducted.
  • Pensions: In Ghana, both employers and employees contribute to pensions. The pensions system has three tiers, with mandatory first and second tiers for all employees in the public and private sectors. The second tier provides a lump sum benefit, and the third tier is a voluntary, fully funded, privately managed Provident Fund Scheme and Personal Pension Scheme component. Tier 1 is regulated by the Social Security and National Insurance Trust (SSNIT), while Tier 2 and 3 are regulated by approved private pension firms.

Other payroll items

  • Taxation of Bonuses: Employers are required to pay taxes on the total bonus payments made in a year. The tax rate for this depends on the percentage of the bonus to the annual basic salary of the employee.
  • Taxation of Overtime: The overtime rate in Ghana is applicable to junior staff employees whose annual income is less than Ghc18,000.00 and whose monthly basic salary is Ghc1,500.00 or lower. This means that employees who earn less than this amount are eligible for the overtime rate, while those who earn more than this amount are required to add the overtime amount to their taxable income and will be taxed at the graduated tax rates.
  • Tax Deductions: Before calculating PAYE, the following must be deducted.

    a. Social Security and National Insurance Trust (SSNIT)

    b. Voluntary Pensions (Tier 3) - A percentage of the basic salary either     paid by the employer or employee or both.

    c. Deductible Reliefs - Including mortgage interest paid, personnel     granted reliefs from GRA and life insurance reliefs.

  • Allowances: These are additional income, usually provided in cash to employees. This includes allowances for transportation, rent, risk, health, and child education.
  • Employee Benefits: They are non-cash allowances provided to employees that are added to their income for tax purposes. These benefits can include accommodations, vehicle and fuel, electricity, and water benefits.

Tax Payment Obligation

Individuals and entities are the two categories of taxable persons in Ghana. The entity category includes companies (including branches), trusts, and partnerships.

As an employer, it is your responsibility to deduct taxes and pensions from your employee's salaries or wages and remit them to the appropriate tax authorities.

To accomplish this, you must first register for income taxes with the GRA and for pensions with the Social Security and National Insurance Trust (SSNIT) to regulate Tier 1. Additionally, you must register with any approved private pensions firm to regulate Tiers 2 and 3.

Employees are also responsible for paying taxes to GRA on any additional income they receive outside of their employment income. This includes income from investments, rent income, and self-employment.

Tax Residency

For tax purposes in Ghana, a person is considered a tax resident if they fall under one of the following categories during a tax year:

  1. They are a Ghanaian citizen, with the exception of Ghanaians who own permanent residences abroad and reside there throughout the year.
  2. They are foreign national who has been present in Ghana for a total of 183 days or more within a 12-month period, which is equivalent to at least half of the year.
  3. They are a member of a partnership in which any of the partners resided in Ghana at any point during that year.
  4. They are a company that is incorporated under the Companies Act or that exercises management and control in Ghana at any time during the year.
  5. They are a permanent establishment located in Ghana.
  6. They are a member of a partnership in which any of the partners resided in Ghana at any point during that year.

If an individual does not meet the above criteria, they are classified as a non-resident for tax purposes.

Understanding other forms of Taxes in Ghana

  • Value Added Tax: Value Added Tax is a consumption tax that is imposed on the value added at each stage of the production and distribution chain of goods and services. The tax is ultimately borne by the final consumer and is collected by a VAT-registered supplier on behalf of the government. The tax must be accounted for and remitted to the GRA no later than the last day of the following month after it was deducted.
  • Withholding Value-Added Tax: Certain VAT-registered suppliers are designated to withhold VAT on payment for standard-rated VAT supplies. The withheld VAT should be remitted to the GRA by the 15th of the subsequent month after the VAT was withheld.
  • National Health Insurance Levy: The National Health Insurance Levy is a levy imposed on the supply of goods and services, as well as the import of goods and services into Ghana to help finance the National Health Insurance Scheme. This levy is included in the base calculation for VAT taxation and should be accounted for and remitted to the GRA together with the VAT return.
  • Ghana Education Trust Fund Levy: The Ghana Education Trust (GET) Fund Levy is a levy imposed on the supply of goods and services, as well as the import of goods and services into Ghana to support the delivery of quality education to the citizens of Ghana from the basic to the tertiary level. This levy is included in the base calculation for VAT taxation and should be accounted for and remitted to the GRA together with the VAT return.
  • Covid-19 Health Recovery Levy: The COVID-19 Health Recovery Levy Act, 2021 (Act 1068), imposes a special levy is imposed on the supply of goods and services, as well as the import of goods and services into Ghana. This levy is included in the base for VAT taxation and should be accounted for and remitted to the GRA together with the VAT return.
  • Import Duties: The cost of insurance and freight of imported items is typically subject to duties of up to 35%, based on the nature of the item. In addition, certain goods are subject to an additional 2% special import levy, which is expected to expire in December 2024.
  • Miscellaneous Taxes: There are various other taxes, levies, and duties in Ghana including stamp duties, airport tax, excise duties, communication service tax, mineral royalties, national fiscal stabilization levy, rent tax, gift tax, capital gains tax, and vehicle income tax among others.

Summary of procedure to comply with payroll regulations in Ghana

  1. Register for tax & pensions at GRA and SSNIT + approved private pensions firms respectively.
  2. Deduct taxes and pensions from employees’ salaries, adding the employer's pensions contribution as well.
  3. Remit taxes and pensions to the appropriate authorities
  4. File tax and pensions returns
  5. Keep accurate records

It is important for individuals and businesses operating in Ghana to comply with their tax obligations to avoid penalties and other legal consequences. Payroll regulations in Ghana can change, so it's important to stay up to date with any changes to tax rates or other regulations that may affect your business.

Cadana provides an automated payroll platform that enables employers to easily manage their payroll in and beyond Ghana (globally). Cadana's platform provides employers with an automated tax system, allowing for the deduction of taxes and pensions, as well as tax returns and pension reports. Additionally, Cadana ensures client statutory compliance, among other benefits.

While this is a basic guide, employing the services of a qualified tax professional may also help individuals and businesses to better understand their tax obligations and minimize their tax liability.