In a world filled with diverse financial challenges and opportunities, cultivating a strong foundation in financial literacy is more essential than ever. This comprehensive guide has been crafted with the singular goal of empowering you with the knowledge and skills necessary to navigate the intricate landscape of personal finance.
We recognize that the journey toward financial well-being can be both exciting and complex, and this project aims to serve as a reliable companion, providing insights, strategies, and practical information to foster financial literacy. Whether you’re embarking on your first job, considering investments, or contemplating major financial decisions, this guide is designed to equip you with the tools needed to make informed choices, build a secure future, and achieve your financial goals.
Savings and Banking
Statutory deductions are mandatory amounts subtracted from your gross pay and remitted to the government. Generally, income deductions can be categorized into four types: Statutory Deductions, Pension Deductions, Loan Repayments, and Other Deductions. While some employers may only facilitate the first one or two categories, others might allow a broader range of deductions, including insurance premiums, car loan payments, student loan payments, investment savings, or charitable contributions. Establishing salary deductions streamlines the process, ensuring a hassle-free way to meet financial obligations without the need to manually transfer funds each pay period. In this article, we will focus on elucidating the first two types of deductions: statutory and pension deductions.
HOW ARE DEDUCTIONS CALCULATED?
It’s crucial to note that specific employers may incorporate additional calculations and considerations. Therefore, the information provided here is general; if you have concerns about calculations or variations in what constitutes taxable or non-taxable income, it is advisable to consult with your employer.
PENSION DEDUCTIONS
I will start by explaining pension deductions because statutory deductions remitted to the government are calculated based on your non-pensionable income. If you contribute to a pension plan (allowing up to 20% from both you and your employer) and/or the National Insurance Scheme (N.I.S., which will be elaborated on later), this total amount is deducted first. Subsequently, other statutory deductions are calculated based on the remaining income, referred to as the statutory income.
As exemplified in the preceding illustration, statutory deductions are computed from the Gross Income after pension payments have been subtracted, commonly known as Statutory Income.
In addition to the National Insurance Scheme (N.I.S.), the other statutory deductions encompass:
Income Tax – P.A.Y.E.
Calculated at 25% of the amount of statutory income exceeding the tax threshold. If the statutory income surpasses $500,000, the tax rate is determined as follows:
– (Statutory Income – $500,000) * 30% + ($500,000 – Tax Threshold) * 25%
The Tax Threshold represents the gross pay amount exempt from taxation, currently set at $125,008 per month. The figure used to compute P.A.Y.E. is termed taxable income, generally defined as Taxable Income = Statutory Income – Income Tax Threshold.
SOCIAL TAXES:
Education Tax
This levy supports the Ministry of Education’s financial needs and is calculated at 2.25% of taxable income for employees, with employers obligated to contribute 3.5%.
N.H.T. – National Housing Trust
Contributions are directed to this government entity, offering Jamaicans housing benefits upon qualification. N.H.T. is calculated at 2% of taxable income for employees, while employers contribute 3%. Further information on accessing N.H.T. benefits can be found in my article on the subject.
N.I.S. – National Insurance Scheme
Primarily designed to provide Jamaicans with a pension upon reaching retirement age, N.I.S. contributions are payable if individuals have contributed through salary payments for at least 1443 weeks (3 years). N.I.S. is calculated at 3% of gross income but is capped at the insurable wage ceiling, presently set at $3 million per annum or $250,000 per month. In simpler terms, the maximum N.I.S. deduction is 3% of $250,000 or $7,500 per month. Additional details on the insurable wage ceiling and the planned increase to $12,500 in April 2022 can be found in my related article.
To summarize the four statutory deduction payments made by employees:
Income Tax – P.A.Y.E. (25% for amounts over the tax threshold*)
Education Tax (2.25%)
N.H.T. – (2%)
N.I.S. – (3% up to a max of $7,500)**
*Tax Threshold – Amount of gross pay which no tax is charged on. Currently $125,008 per month.
**Refer to my article on the Insurable Wage Ceiling for N.I.S. calculations. This amount will increase to $12,500 in April 2022.
Additionally, there is an employer contribution towards the Human Employment and Resource Training (HEART), amounting to 3% of the employee’s gross income. HEART contributions play a pivotal role in funding training and certification programs for all working-age Jamaicans.
