Personal Income Tax (PIT) plays a vital role in Nigeria's tax framework, affecting individuals, partnerships, trustees, and estates that earn income locally or from Nigerian sources. Governed by the Personal Income Tax Act (PITA) 2004 (as amended), the system is designed to be fair and progressive—ensuring those who earn more, contribute more—while offering relief to ease the burden on taxpayers.
Personal Income Tax is a tax imposed on gain or profit from any trade, business, profession, or vocation, as well as on any salary, wage, fee, allowance, or other gain or profit from employment. In essence, personal income refers to the total earnings or revenue received by an individual from various sources during a given period, typically a financial year. It encompasses all income earned from employment and non-employment activities.
Understanding how Personal Income Tax works is essential not just for legal compliance, but also for proper financial planning. This article offers a practical overview of what individuals need to know about personal income tax in Nigeria.
ELIGIBILITY TO PAY PERSONAL INCOME TAX
According to Section 2 of the Personal Income Tax Act (PITA), personal income tax is payable on the total income of individuals and certain classes of persons, based on their residency status and the origin of their income.
The following categories of persons are liable to pay personal income tax in Nigeria:
- Individual Residents in Nigeria: Any individual resident in Nigeria who earns income from employment, business, profession, trade, or vocation is subject to tax. The state tax authority of the individual's place of residence administers the tax.
- Public Sector Personnel Covered by Federal Taxation: Members of the Nigerian Army, Navy, and Air Force; the Nigeria Police Force (excluding civilians); officers of the Nigerian Foreign Service; and residents of the Federal Capital Territory are taxed by the Federal Inland Revenue Service (FIRS).
- Non-Residents with Nigerian-Sourced Income: Non-resident individuals who derive income or profit from Nigeria are liable to pay personal income tax. This includes earnings from services rendered in Nigeria, business operations, and other income generated within the country.
- Itinerant Workers: These are individuals who work and move across different states within a tax year. Under the law, any state where an itinerant worker is found during the year may collect tax from them. However, credit is granted for tax already paid in another state to avoid double taxation.
- Communal or Village Income: Where a community or village earns income that cannot be individually assessed, the tax authority may impose tax based on an estimated total income of all or some of its members, or on the communal income itself.
- Trusts and Estates: Trustees or executors managing settlements, trusts, or estates are liable to pay personal income tax on income arising from such arrangements. The applicable state tax authority is determined by the location of the trust, estate, or executor.
It's worth noting that personal emoluments of enlisted personnel (serving in non-officer roles in the armed forces) are exempt from tax under the Act. However, any other income they earn, outside of such emoluments, is taxable.
EXEMPTED INCOME FROM PERSONAL INCOME TAX
Certain categories of income are legally exempted from personal income tax under Section 19 of the Personal Income Tax Act:
- Emoluments and allowances paid to members of visiting UK forces, consular officers, and employees of foreign states (excluding Nigerian citizens or residents) under conditions defined in the Third Schedule.
- Interest income earned by non-residents on specific government loans and bonds, international development loans, or foreign currency deposits brought into Nigeria through approved channels.
- Income exempted through treaties or international agreements, where the Minister of Finance grants such exemptions by notice. This includes arrangements with foreign governments or international organizations.
However, salaries, bonuses, or wages paid out of exempt income may still be taxed, and no party may include tax exemptions in contracts without prior approval from the Minister of Finance and the President.
ADMINISTRATION OF PERSONAL INCOME TAX
The administration of PIT is split between two key authorities:
- Federal Inland Revenue Service (FIRS): FIRS handles the
taxation of:
- Residents of the Federal Capital Territory (FCT)
- Members of the Armed Forces
- Officers of the Nigeria Police Force
- Employees of the Ministry of Foreign Affairs and other federal institutions.
- State Internal Revenue Service (SIRS): Each state tax authority is responsible for administering PIT for individuals residing or conducting business in their respective states.
All taxpayers are required to register and obtain a Personal Identification ID. This unique identifier facilitates tracking of tax compliance and is required for filing returns and making payments.
PERSONAL INCOME TAX FILING AND PAYMENT PROCEDURES
Understanding the proper procedures for filing and remitting personal income tax is critical for both employers and individual taxpayers. These procedures vary depending on whether the taxpayer is salaried or self-employed.
- PAYE Compliance for Employers and Employees
Under Section 81 of the Personal Income Tax Act, income tax chargeable on an employee—whether or not a formal assessment has been issued—shall be deducted and remitted directly by the employer from the employee's emoluments if directed by the relevant tax authority. This is known as the Pay-As-You-Earn (PAYE) system.
Employers are required to deduct PIT from employee salaries and remit it to the relevant State Internal Revenue Service (SIRS) or the Federal Inland Revenue Service (FIRS, where applicable) on or before the 10th day of the month following the payment of salaries.
Employers must file an annual return of all emoluments paid to their employees in the preceding year. This return must be submitted on or before 31st January of each year.
Failure to file annual returns by the 31st of January attracts penalties. Late remittance of PAYE deductions may also attract a penalty of 10% of the tax due, plus interest at the prevailing rate.
Employers are advised to maintain accurate payroll records, deduct correct amounts based on the applicable tax rates and reliefs, and ensure timely filing to avoid sanctions.
- Self-Assessment for Self-Employed Individuals
Individuals who operate businesses, engage in freelance work, or earn income outside formal employment must adopt the self-assessment system. Self-employed persons must file annual returns of their income and expenses. Returns are due within 90 days of the end of the tax year (i.e., by March 31 each year).
For businesses, returns must be filed within six months after the end of their accounting year.
Upon filing, self-employed individuals are required to calculate and pay their tax based on applicable rates and allowable deductions. Non-compliance with filing and payment obligations attracts both financial penalties and possible prosecution.
TAX DEDUCTIONS AND CREDITS
Taxpayers in Nigeria are allowed certain deductions and reliefs that help reduce their taxable income. Understanding these can result in significant tax savings, the allowable deductions are as follows:
- Approved Deductions
These are statutory deductions allowed by law before calculating tax:
- Pension Contributions: Fully deductible if paid under a recognized pension scheme compliant with the Pension Reform Act.
- Life Insurance Premiums: Premiums paid by a taxpayer on their own or spouse's life insurance policy are deductible (within allowable limits).
- National Housing Fund (NHF): Contributions made to the NHF are deductible from taxable income.
- Tax Reliefs
These reduce the overall tax burden and are applied after deductions:
- Disability Relief: A person certified as disabled is entitled to an extra 20% tax relief on earned income.
- Dependents' Relief: Taxpayers who financially support dependents (such as parents or children) may qualify, subject to specific state tax rules.
- Business-Related Deductions
Self-employed individuals or business owners can deduct legitimate business expenses such as office rent, staff wages, utility bills, transportation, and professional service fees—provided these are wholly, exclusively, and necessarily incurred in the course of business.
- Investment Income and Loss Reliefs
- Approved Investment Income: Interest earned from government bonds and other approved securities is exempt from tax.
- Loss Relief: If a business incurs losses, these can be carried forward and offset against profits for up to four years.
- Capital Allowances
Capital allowances are deductions allowed for wear and tear of business assets. Applicable to machinery, equipment, and other qualifying assets. Includes initial allowance (first year), annual allowance (over time), and balancing allowance (on disposal).
- Foreign Income Tax Credit
If a taxpayer earns income abroad and pays tax on it, a tax credit may be granted in Nigeria. This credit is proportionate to the portion of total income taxed abroad, preventing double taxation.
RECENT TAX REFORMS IN NIGERIA
To enhance efficiency and compliance, Nigeria's tax system has undergone significant reforms, one of these reforms is the digitalization of Tax Services, which enable many states to operate e-tax platforms for registration, filing, payment, and issuing tax receipts. This simplifies the process and improves transparency.
CONCLUSION
Personal Income Tax is a legal obligation that affects all income-earning individuals in Nigeria. Understanding how it works from eligibility and tax rates to deductions and filing requirements, empowers taxpayers to comply responsibly while maximizing legitimate reliefs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
