As a small business owner in Nigeria, understanding taxation is crucial for compliance and business success. Personal income tax (PIT) is an essential part of Nigeria’s taxation system, as it significantly contributes to government revenue. This guide aims to help you understand personal income tax, how it applies to you, and what steps you should take to ensure compliance.
What Is Personal Income Tax?
In its simplest sense, personal income tax (or PIT, as accountants prefer to abbreviate it) is a statutory obligation that individuals, communities, and their families have to pay on their incomes. In the context of Nigeria, PIT is guided by the Personal Income Tax Act Cap P8 LFN 2004 (as amended)
Now, while PIT is a federal obligation, it is worth noting that everyone remits theirs to the Inland Revenue Service of the State in which they reside. This is mandatory regardless of the bodies or institutions they work for – whether it is federal, state, or even a local government body, as well as whether it is a private organization.
There is also the Federal Inland Revenue Service (FIRS), which collects personal income taxes from staff of the Ministry of Foreign Affairs, other Nigerians and foreigners outside the country who earn their incomes in Nigeria, Police Officers, and Military Officers.
Read More: Small Business Taxes in Nigeria: what you need to know
Types Of Personal Income Tax In Nigeria
Although the PIT term is quite encompassing, it can also be broken down into sub-categories based on the context of Nigeria. Generally, the two types of personal income tax are:
Pay-As-You-Earn (PAYE):
This is a scheme in which the tax authorities deduct taxes directly from the wages or salaries of employees. In most cases, PAYE taxes are remitted on the 10th day of the succeeding month, while the deadline for filing tax returns for this tax scheme is the 31st of January of the succeeding year.
Direct Assessment:
Then, there is the direct assessment tax, which mostly applies to self-employed individuals. Because these people don’t have any employers, they are obligated to file a return of income earned in the preceding year and pay the required personal income tax to the relevant tax authority without notice or demand.
For direct assessment, the due date for filing returns and remittances is usually the 31st of March of every calendar year.
Charging Structure For Personal Income Taxes:
Now, according to Section 3 of the Personal Income Tax Act, some of the incomes that are chargeable to the tax include:
- Gains or profits made from any business, trade, or vocation for whatever period it might have been exercised or carried out
- Wages, salaries, allowances, fees, or other gains from employment. This includes bonuses, premiums, compensations, benefits, or any other perquisites allowed by any person to any employee other than so much of any sums as or expenses incurred as they perform their duties.
- Gains or profits such as premiums from a right granted to any other person for the use of any property
- Dividends, interests, or discounts
- Pensions, charges, or gratuities
- Any additional profit or other payment not falling into any of these paragraphs that is also inclusive of this subsection
To calculate PIT, experts make use of the graduated tax scale or table, with rates usually falling between 7% and 24% depending on the amount of income being charged. However, regardless of their income, the highest tax payable by any individual is 19.2% of their gross income.
We should also point out that individuals are entitled to a Consolidated Relief Allowance of 200,000 Naira or 1% of their gross income – whichever of the two is higher – plus 20% of their gross income. When an individual earns less than 300,000 Naira per month, they are subject to a minimum tax of 1% of their gross income.
So, to break this down, experts essentially make use of this formula to calculate personal income tax:
Taxable Income = Income – Allowable Deductions & Deductions
Personal Income Tax = Taxable Income/Tax Rate
What Are The Penalties For Not Paying Your Tax?
At the moment, the Nigerian government imposes some very strict fines and penalties to individuals who don’t pay their taxes.
The government requires that employers file returns of remunerations and tax deducted from the employees for the preceding year – with the deadline being the 31st of January for every year.
Any individual who doesn’t file a return of their taxes will be liable on a conviction to a fine of 50,000 Naira and an additional sum of 100 Naira for every day that they fail. A jail term of 6 months can also be imposed, and in some cases, the government combines both penalties.
At the same time, employers who fail to file a return will be liable on a conviction to a penalty of 500,000 Naira for a corporate body and 50,000 Naira in the case of an individual.
Conclusion
Personal income taxes are very important in Nigeria’s business climate. And whether you’re a business owner or an employee, being aware of them will be critical to you as well.
If you’d like to learn more about running a business in Nigeria, don’t forget to subscribe to our newsletter.