What Law Guides Personal Income Tax (PIT) in Nigeria

The Personal Income Tax is guided by the Personal Income Tax Act Cap P8 LFN 2004 (as amended)

What is your Personal Income?

Your personal income is total amount of money you make from any trade, business, profession or vocation and pension received from such.

Who is to Pay the Personal Income Tax and to Whom is it paid

The tax is imposed on income of all Individuals, Communities, Families and Trustees or Executors and is to be paid to the State of their residency for each year, i.e., the State’s Internal Revenue Service (IRS). Residents of FCT – Abuja, persons employed in the Nigerian Armed Forces (Army, Navy and Air Force), Police officers, officers of the Nigerian Foreign Service and a person resident outside Nigeria who derives income or profit from Nigeria, are all to pay to the Federal Inland Revenue Service (FIRS).

I don’t reside in Nigeria, do I need to pay my income tax to Nigeria?

Note that some nonresidents of Nigeria may still be taxed in Nigeria under certain conditions, such as where the business or trade producing the income for them is wholly or partially carried on or deemed to be carried on in Nigeria.

What is “gross income”?

“gross income” means income from all sources less all non-taxable income, income on which no further tax is payable, items exempted from tax and all allowable business expenses and capital allowance.

Will all my income be taxed?

No, not all of your income will be taxed. “Chargeable/taxable income” is the amount of the total income of an individual for a year, after any income exempted has been excluded and the deductions allowed by the Act have been made.

Income exempted from taxation are those as stated in the Third Schedule of the Personal Income Tax Act.

While the deductions to be made before arriving at your taxable income are all outgoing and expenses, or any part thereof, wholly, exclusively, necessarily and reasonably incurred during that period and ultimately borne by you in the production of the income. Such as:

  1. payable interest on money you borrowed as capital in acquiring the income;
  2. the rent and premiums on land or buildings occupied for your trade, business, profession or vocation for that period;
  3. any expense incurred for repair of premises, plant, machinery or fixtures employed in acquiring the income, or for the renewal, repair or alteration of any implement, utensil or article so employed;
  4. bad debts incurred in your trade, business, profession or vocation;
  5. a contribution or an abatement deducted from the salary or pension of a public officer under the Pensions Act or under any other approved scheme or the Nigeria Social Insurance Trust Fund or other retirement benefits scheme for employees throughout Nigeria; Etc.
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Additionally, the government has granted a tax relief under the heading “Personal relief and relief for children, dependents”. The government is giving up taxing you a part of your annual income. They expect that you use this money to take care of yourself, children and dependents. It is called the “Consolidation Relief Allowance” and it is N200,000.00 or 1% of gross income whichever is higher, plus 20 % of the gross income.

The balance from all these deductions, exemptions and relief is what shall be taxable.

What deductions may be made?

There shall be allowed a deduction of the annual amount of any premium paid by the individual during the year preceding the year of assessment to an insurance company in respect of insurance on his life or the life of his spouse, or of a contract for deferred annuity on his own life or the life of his spouse

Are deductions made automatically?

No. No deduction shall be allowed to you unless you claim it in writing in such form as the relevant tax authority may prescribe.

How much is my Personal Income Tax?

The rate of the tax ranges from 7% to 24%, depending on the amount of chargeable income – Individuals are subject to minimum tax of 1% of gross income where the income is less than N300,000 per annum.

After the relief allowance, deductions and exemptions had been granted in accordance with the law, the balance of income shall be taxed as specified in the following tax table:

  1. First N300,000 @ 7 %
  2. Next N300,000 @ 11 %
  3. Next N500,000 @ 15 %
  4. Next N500,000 @ 19 %
  5. Next N1,600,000 @ 21 %
  6. Above N3,200,000 @ 24 %

Who calculates the tax I’m to pay?

You do. A taxable person (such as yourself) is required to file a return of income and in the return, calculate the amount of tax payable in the prescribed form.

How will Government verify my calculated tax?

Every taxable person (such as yourself) is required to keep Books of Accounts which will be used by the tax authority to verify your calculated tax. If you fail or refuse to keep books of accounts which, in the opinion of the relevant tax authority, are adequate for the purpose of the tax, you are be liable on conviction to a penalty of N50,000 for individuals and N500,000 for corporate entities.

Furthermore, for the purpose of obtaining full information in respect of your income or gain, the relevant tax authority may give you notice requiring you to complete and deliver any return to the tax authority, personally attend before an officer of the relevant tax authority for examination with respect to any matter relating to such income gains, produce for examination any book, document, account and return which the relevant tax authority may deem necessary or give orally or in writing any other information including a name and address specified in the notice.

If you are in salary employment as your only source of income, the above does not apply to you because your employer is responsible for your PAYE tax.

What duty do I owe the State aside from payment of my tax?

You are required by law to file a return of income every year, without notice or demand, with the tax authority of the State in which you are deemed to be a resident. The return of income is expected to state the amount of income and particulars to any such income, allowance, relief, deduction or otherwise as may be material for that purpose from every source of the preceding year. Notwithstanding that a tax authority requires you to file a return containing the amount of your income for each year, a person whose only source of income in any year of assessment is employment is such that he earns N30,000 or less from that source is not required to file return of income.

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When should I file my returns of income?

The due date for filing returns of the tax is 31st March of every year (within ninety days from the commencement of every year of assessment). Note that a person who files his/her return within the time specified for filing of the return shall, if there is no default in the payment arrangement, be granted a bonus of 1% of the tax payable.

What if I fail to file my returns?

You shall be liable on conviction to a fine of N5,000 and a further sum of N100 for every day during which the failure continues or imprisonment of six (6) months or both. Also, the relevant tax authority may proceed to assess you as a taxable person chargeable with income tax after the expiration of the time allowed for the delivery of the return (after 31st March of every year).

When should I make payment after I have been assessed?

Income tax charged by an assessment which is not or has not been the subject of an objection or appeal, shall be payable within two months after the date of service of that notice.

If you do not pay within the period, a sum equal to ten % per annum of the tax shall be added, and the provisions of the Act relating to the recovery and collection of tax shall apply to the recovery and collection of that sum.

The relevant tax authority shall serve a demand note on you and, if payment is not made within one month from the date of the service of the demand note, the relevant tax authority may proceed to enforce the payment.

The penalty imposed is not be deemed to be part of the tax paid for the purpose of claiming relief.

If without lawful justification or excuse, of which burden of proving rests on you, you fail to pay the income tax within the period of one month, you are guilty of an offence.

Do I pay interest on late payment of tax?

Yes. The tax due from a taxable person shall carry interest on annual basis at bank base lending rate from the date when the tax becomes payable until it is paid.

How do I prove that I have cleared my tax?

By obtaining your tax clearance certificate. Whenever the relevant tax authority is of opinion that for the three years immediately preceding the current year of assessment, fully paid or that no tax is due on your income or that you are not liable to tax for any of those three years, it shall issue you with a tax clearance certificate within two weeks of your demand for the certificate. That the payment of current year tax shall not be made a condition for the issuance of the certificate unless you are leaving the country finally.

A tax clearance certificate contains the following in respect of the last three years of assessment –

  1. chargeable income;
  2. tax payable;
  3. tax paid;
  4. tax outstanding or alternatively a statement to the effect that no tax is due; and
  5. tax payer identification number (T.I.N).

Why do I need my tax clearance certificate?

A ministry, department or an agency of government or a commercial bank with whom you have any dealing with respect to any transactions may demand your tax clearance certificate for the three years immediately preceding the current year of assessment and shall verify the genuineness by referring same to the issuing tax authority before conducting such transaction with you.

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Such transactions include:

  1. application for Government loan for industry or business;
  2. registration of motor vehicle;
  3. application for certificate of occupancy;
  4. application for award of contracts by Government, its agencies and registered companies;
  5. application for trade licence and import or export licence;
  6. application for transfer of real property;
  7. application for registration as a contractor;
  8. confirmation of appointment by Government as chairman or member of a public board, institution, commission, company or to any other similar position made by the Government;
  9. application for registration of a limited liability company or of a business name;
  10. appointment or election into public office.
  11. any other transaction as may be determined from time to time.

Note the following, if;

  1. for the purpose of obtaining a tax clearance certificate, you give incorrect information in relation to any matter or thing affecting his liability to tax; or
  2. obtain a tax clearance certificate through misrepresentation, forgery or falsification,

You are guilty of an offence and liable on conviction to a fine of N50,000 plus twice the tax payable by you or to imprisonment for three years or to both such fine and imprisonment.

A person, ministry, department or an agency of government or a commercial bank, who fails to request for your tax clearance certificate before performing such transaction with you is guilty of an offence and is liable on conviction to a fine of N5,000,000.00 or to imprisonment for 3 years or both fine and imprisonment.

What is P.A.Y.E?

P.A.Y.E. refers to “Pay As You Earn”. It is a method used to deduct personal income tax at the source the moment an employee earns their salary. It is deducted by the employer and paid to the relevant tax authority on behalf of the employee.

Every employer shall be required to file a return with the relevant tax authority of all emoluments paid to its employees, not later than 31st January of every year in respect of all employees in its employment in the preceding year failure which such employer shall be liable on conviction to a penalty of N500,000 in the case of a body corporate and N50,000 in the case of an individual.

When should I as an employer remit the P.A.Y.E tax of my employees?

As an employer, you are expected to remit the P.A.Y.E tax of your employees by the 10th day of every succeeding month. This day is called the due date for remittance.

Where do I go where dispute arise regarding my tax?

The Tax Appeal Tribunal has the powers to entertain all cases arising from operations of this Personal Income Tax Act.

Example of How to Calculate Personal Income Tax

CONSOLIDATED SALARY / GROSS EMOLUMENT

Determine the consolidated salary which is the gross emolument of the Tax Payer Per Annum. That is Basic Salary, Housing, Transport, Leave, Utility, Furniture, Meal Allowances etc.

Multiply by 12 to get the gross Per Annum

 ItemAmount (N)
1.Basic Salary50,000
2.Housing20,000
3.Transport10,000
4.Meal10,000
5.Furniture10,000
 TOTALN100,000

Total consolidated salary is N100,000 Per Month.

Therefore N1,200,000 Per Annum (N100,000 X 12)

  • CONSOLIDATED RELIEF ALLOWANCE (CRA)

A Tax relief of N200,000.00 or 1% of the Consolidated Salary, whichever is higher, plus 20% of the Consolidated Salary is given.

Less N200,000 from the N1,200,000

Also less 20% from N1,200,000 = N240,0000.

Therefore CRA = N200,000 + N240,000 = N440,000.

  • TAX EXEMPT ITEMS

Check Tax payer’s contribution in any of the following:

  • National Housing Fund Contribution (Mandatory contribution of 2.5% of monthly income of Nigerians earning N3000 and above per annum)
    • National Health Insurance Scheme (5%)
    • Life Assurance Premium (Tax deductibility applies if withdrawn within 5 years)
    • National Pension Scheme (8% of Basic, Housing and Transport)
  • ASCERTAIN CHARGEABLE INCOME

Compute taxable income based on steps 1 to 3 which is less CRA from consolidated salary.

N1,200,000 – N440,000 (CRA) = N760,000.

Therefore, for earnings of N1,200,000, the chargeable income therefore is N760,000.

  • INCOME TAX RATES

Apply the Tax Band to the Chargeable Income to arrive at the tax payable per annum:

First N300,000 @ 7% N21,000

Next N300,000 @ 11% N33,000

Next N500,000 @ 15% N75,000

Next N500,000 @ 19% N95,000

Next N1,600,000 @ 21% N336,000

Over N3,200,000 @ 24%

Therefore, for a Chargeable Income of N760,000 the Tax will be:

1st N300,000 @ 7% = N21,000 (Remaining N460,000)

Next N300,000@11% = N33,000 (Remaining N160,000)

Next N500,000 @ 15% = N160,000 X 15% = N24,000

Total Tax payable per Annum = N21,000 + N33,000 + N24,000 = N78,000 PA

  • MONTHLY TAX PAYABLE

The Tax Payable Per Annum is divided by 12

N78,000 divided by 12 = N6,500 Per Month.

Therefore the tax payable every month shall be N6,500 on the PAYE Scheme.

  • MINIMUM TAX DETERMINATION

Where the Chargeable Income obtained is lower than 1% of the consolidated or gross emolument then 1% of the consolidated salary shall be the Tax Payable Per Annum

Written by Imeh Imeh LLB, BL