Keith Mack
Personal income tax in Nigeria is a tax levied on individuals' total annual earnings. It is calculated after applying all allowable deductions and reliefs, including the Consolidated Relief Allowance (CRA) and pension contributions. The tax system is progressive, meaning the tax rate increases with higher income. The Personal Income Tax Act (PITA) governs personal income tax in Nigeria and outlines the guidelines for calculating and collecting taxes from individuals. It ensures that every taxpayer contributes a fair share based on their earnings.
| Characteristics | Values |
|---|---|
| What | Personal Income Tax |
| Governing Law | Personal Income Tax Act (PITA) |
| Who | Individuals who are either employed or running their own businesses under a business name or partnership, communities, families, and any trustee or executor under any settlement, trust or estate deemed to be resident in the State at a particular year |
| Exemptions | Those exempted by law as stipulated in the Third Schedule of PITA 104 CAP P8 LFN 2004 & (Amendment) at 2011 |
| Taxable Income | Income or profits of individuals who are in employment and/or run their businesses either as sole proprietors or as partnerships |
| Tax Rate | Progressive, meaning the tax rate increases with higher income |
| Minimum Tax | 1% of the total income |
| Compliance | Section 37 of PITA (as amended) imposed the payment of income tax on the chargeable income of an individual which must be filed within 90 days from the commencement of the year (Sec. 41) |
| Withholding Tax | 5% |
| Deductions | Consolidated Relief Allowance (CRA), pension contributions, and different types of income like salaries, bonuses, and benefits |
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What You'll Learn
Who pays personal income tax?
In Nigeria, personal income tax is based on residency rules. Individuals who are resident in Nigeria are taxable on their worldwide income. This includes income received within and outside Nigeria.
Personal income tax is imposed on the income or profits of individuals who are in employment or run their businesses either as sole proprietors or partnerships. This includes individuals who are self-employed, professionals, contractors, traders, and landlords.
The Pay-As-You-Earn (PAYE) system is a method of collecting personal income tax on employees' emoluments. It is the responsibility of the employer to deduct income tax from each employee's pay and remit it to the relevant tax authority on or before the 10th day of the month following the month in which employees are paid. Employees can file returns by first filing an Annual Income Declaration with the Assessment Authority, after which they will be given an Annual Tax Estimate detailing their expected income, reliefs granted, and monthly Tax Estimates. This is then presented to the employer, who deducts the monthly estimated tax.
Direct Assessment is a system of assessing and collecting personal income tax from self-employed persons. It is the duty of a self-employed person to file an annual income tax return for the income earned in the previous year, pay an estimated tax due, and submit the tax return on or before March 31st every year.
The Personal Income Tax Act (PITA) governs personal income tax in Nigeria. This law outlines the guidelines for calculating and collecting taxes from individuals, ensuring that every taxpayer contributes a fair share based on their earnings. The tax system is progressive, meaning the tax rate increases with higher income.
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How is personal income tax calculated?
Personal income tax in Nigeria is calculated based on an individual's total or worldwide annual income. This includes any income from employment or unemployment sources like salaries, wages, bonuses, benefits, and other earnings. The tax system is progressive, meaning that higher income levels are taxed at higher rates.
The calculation starts by determining the gross income, including the 13th-month salary, and applying various deductions and reliefs to arrive at the taxable income. The allowable deductions and reliefs include the Consolidated Relief Allowance (CRA), pension contributions, premium paid in the prior year for a life insurance policy, and capital allowance.
Once the taxable income is determined, the applicable tax rate is applied based on the progressive tax rate structure. The specific tax rates are defined by the Personal Income Tax Act (PITA) and its amendments.
It is important to note that individuals resident in Nigeria are taxable on their worldwide income. This includes non-resident individuals who perform duties of employment wholly or partly in Nigeria, unless certain exceptions apply, such as when the remuneration is liable to tax in another country under a double taxation treaty.
Understanding personal income tax calculation in Nigeria is crucial for compliance with the country's legal requirements and to take advantage of tax reliefs and deductions. Additionally, it helps individuals manage their finances more effectively and ensures that every taxpayer contributes their fair share based on their earnings.
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How to file personal income tax returns
In Nigeria, individuals who are residents are taxed on their worldwide income. This means that they are taxed on income received within and outside Nigeria. Non-residents are liable to pay tax in Nigeria if their employment duties are performed wholly or partly in the country, unless they meet certain other criteria.
Personal Income Tax (PIT) is charged on the income of sole traders, self-employed individuals, partnerships, trustees, and executors. It is based on the residency rule, as outlined above. The Finance Act (FA) 2020 introduced the significant economic presence rule for PIT, meaning that gains or profits from trade or business are taxable in Nigeria when an individual, executor, or trustee outside the country provides technical, management, consultancy, or professional services to a person resident in Nigeria.
To file personal income tax returns, individuals must complete the following steps:
- Determine your residency status: As mentioned earlier, individuals who are residents of Nigeria are taxed on their worldwide income. If you are a non-resident, you may still be liable to pay tax on any income earned from employment duties performed in Nigeria.
- Gather your income information: You will need to collect all the relevant information regarding your income for the tax year. This includes income from employment, business profits, investment income, and any other sources.
- Calculate your taxable income: Subtract any non-taxable income, income on which no further tax is payable, tax-exempt items, allowable business expenses, and capital allowances. You can find a list of these deductions on the relevant government websites.
- Determine your tax rate: The tax rate may vary depending on your income level and other factors. You can refer to the tax tables provided by the Nigerian tax authorities to determine the applicable tax rate for your income.
- Complete the tax return form: You will need to obtain the appropriate tax return form from the Nigerian tax authorities. Carefully fill out the form, providing all the required information accurately.
- Submit the tax return: File your completed tax return form with the relevant tax authority within the specified deadline. In Nigeria, personal income tax returns must be filed within 90 days from the commencement of the year.
- Pay the tax due: After filing your tax return, you will need to pay any tax that is owed to the government. Make sure to pay the correct amount by the due date to avoid penalties and interest.
It is important to stay up to date with the latest tax laws and regulations, as they may change over time. Additionally, individuals can seek assistance from tax professionals or the Chartered Institute of Taxation of Nigeria to ensure they are compliant with the Personal Income Tax Act and other relevant laws.
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Tax reliefs and deductions
In Nigeria, the Personal Income Tax Act (PITA) is the primary legislation that governs the taxation of individuals, communities, families, trustees, and estates. The PITA imposes a tax on the total income of taxable persons, subject to specific exemptions and allowable deductions. These exemptions can be found under the Third Schedule to the PITA, Items One and Two of the Sixth Schedule, and other relevant provisions of the PITA, such as Sections 19 and 20.
The PITA also allows for various tax reliefs and deductions, which can reduce the taxable income for individuals. These reliefs and deductions include:
- Statutory tax allowances and reliefs, such as premiums paid in the prior year for a life insurance policy for oneself or a spouse.
- Exemptions for certain types of income, such as termination benefits (compensation for loss of office) up to a specified amount.
- Deductions for non-taxable income, income on which no further tax is payable, tax-exempt items, allowable business expenses, and capital allowances.
- Reliefs for non-resident individuals under double tax treaties to avoid double taxation.
- A minimum tax rate of 1% of the total income for taxpayers with no taxable income due to personal reliefs and allowances or a total income below the minimum tax threshold.
It is important to note that the specific tax reliefs and deductions available to individuals may vary depending on their circumstances and the latest updates to the PITA. Therefore, it is always advisable to refer to the PITA and seek professional tax advice for a comprehensive understanding of the applicable reliefs and deductions.
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Personal income tax for non-residents
Personal income tax in Nigeria is based on residency rules. An individual is considered a tax resident if they have a fixed business base in Nigeria. Non-resident persons are liable to pay tax in Nigeria if their employment duties are wholly or partly performed in the country. However, there are certain exceptions to this rule. If the non-resident individual performs duties on behalf of an employer who is in a country other than Nigeria, and their remuneration is not borne by a fixed base of the employer in Nigeria, they may be exempt from Nigerian taxes. Additionally, if the individual's remuneration is liable to tax in another country under the provisions of the avoidance of double taxation treaty (DTT) with that country, they may not be required to pay taxes in Nigeria.
Foreign persons earning business profits from Nigeria are taxed under Section 6 of the Personal Income Tax Act (PITA) once they establish a fixed base or taxable presence in the country. The introduction of the significant economic presence (SEP) rules under Section 6(A) of PITA further clarifies the taxation of non-resident individuals, executors, or trustees carrying on a trade or business comprising technical, professional management, or consultancy (TPMC). The gains or profits from such activities will be taxable in Nigeria when provided to a person resident in the country.
The withholding tax (WHT) on income related to SEP is typically set at 5% and is considered the final tax liability. Non-resident persons may also seek tax relief under a double tax treaty, depending on the specific circumstances. It is important to note that the Minister of Finance has the authority to issue orders defining the activities that constitute significant economic presence under personal income tax regulations.
Overall, while non-resident individuals may be subject to personal income tax in Nigeria under certain conditions, there are provisions in place to avoid double taxation and ensure compliance with international tax treaties. Understanding and navigating these regulations can be complex, and seeking professional tax advice is always recommended.
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Frequently asked questions
Individuals in employment or self-employment, including communities and trustees, are required to pay personal income tax.
Individuals under the age of 18 and those exempted by law as stipulated in the Third Schedule of PITA 104 CAP P8 LFN 2004 & (Amendment) 2011 are exempt from paying personal income tax in Nigeria.
Personal income tax in Nigeria is levied on various types of income, including salaries, wages, bonuses, benefits, and business profits.
Personal income tax in Nigeria is calculated based on an individual's total annual earnings after applying allowable deductions and reliefs, such as the Consolidated Relief Allowance (CRA) and pension contributions. The tax rate increases with higher income.
