Contributor: Idowu Jesutofunmi
INTRODUCTION
Personal income tax (PIT) in Nigeria is a critical aspect of the country’s tax system and a significant source of revenue for the government, particularly at the federal and state levels. Governed by the Personal Income Tax Act (PITA) 1993, as amended by the Personal Income Tax (Amendment) Act 2011, the tax is levied on the income of individuals, inclusive of employment income, business profits, and investment returns. However, the tax reform bills passed by the National Assembly in 2025 address different taxes in Nigeria, including the Personal Income Tax (PIT). This proposed tax reform promises significant changes to PIT, potentially altering tax rates, deductions, and credits that will affect taxpayers.
Understanding these proposed changes is important for evaluating their possible consequences on individual taxpayers and the broader economy. This is important because taxpayers will see different outcomes based on their income levels. While some taxpayers may see reduced tax liabilities and increased net pay, others could face higher taxes or reduced net pay.
This paper explores some of the key changes in the proposed tax reform bill as it relates to Personal Income Tax, its potential implications for individual taxpayers and the opportunities it presents for lawyers in Nigeria, particularly in the Federal Capital Territory.
REFORMS INTRODUCED TO THE PERSONAL INCOME TAX
- Adjusted Tax Band: The tax reform bill introduces a new tax band and a progressive rate. Higher-income is taxed at higher rates, while low income is exempted or taxed at lower rates. This change is likely to reduce the tax burden of low-income earners in the country and improve their disposable income. The current effective tax rate for PIT is about 19%, which will most likely increase for higher-income earners and decrease for low-income earners under the proposed tax bill.
- Exemption Threshold for PIT: The proposed tax reform bill exempts employees who earn a taxable income of ₦800,000 annually from PAYE tax. Also, individuals with a taxable income of ₦1,000,000 annually and a rent relief of up to ₦200,000 would also be exempt from PAYE tax deductions, leading to higher disposable income. For those earning ₦1,000,000 annually, the rent relief of ₦200,000 will effectively reduce their taxable income to ₦800,000, making them eligible for the exemption. This provision is particularly beneficial for low-income earners as this would help them manage the rising cost of living and provide some financial relief. Employees will have more money to spend, potentially boosting economic activities.
- Introduction of Rent Relief in Place of Consolidated Relief Allowance: The tax reform bill introduced rent relief, which will replace the Consolidated Relief Allowance. An employee shall be granted a rent relief allowance of ₦200,000 or 20% of annual rent paid, whichever is lower. While the rent relief could be beneficial to low-income earners, it may be less beneficial to high-income earners who tend to pay higher rent annually. This would increase PAYE tax for high-income earners and reduce PAYE taxes for low-income earners.
- Notification to Relevant Tax Authority for Claim of Deduction: Section 31 of the tax reform bill provides that deduction shall not be allowed, unless claimed in writing in a form prescribed by the relevant tax authority may prescribe for a year of assessment. This means that taxpayers (individuals and businesses) must actively claim deductions in writing for them to be recognized. However, if a taxpayer does not submit a written claim, they may lose the deduction, increasing their taxable income and overall tax liability. This provision reduces automatic deductions, meaning taxpayers who fail to claim deductions properly may end up paying more tax.
- Exclusion of Compensation and Damages from Taxable Gains: The tax reform bill stipulates that compensation or damages up to N50 million received for any personal or professional wrong or injury including compensation for loss of office or employment, libel, slander, or enticement will not be classified as chargeable gains. This means that any compensation or damages within the ₦50 million threshold will be exempted from Capital Gains Tax (CGT).
- Exemption on disposal of Personal Chattels: Based on section 52(1) of the Bill, a gain accruing on a disposal of an asset which is tangible movable property being personal chattels of an individual shall not be a chargeable gain if the total amount or value of the consideration for the disposal does not in a period of assessment exceed ₦5,000,000 or three times the annual national minimum wage, whichever is higher. This means individuals selling personal assets within this threshold will not be liable to CGT if a gain accrues from the disposal. However, if the total amount exceeds the higher of ₦5,000,000 or three times the annual national minimum wage, then the gain accrued from such disposal will be a chargeable gain and would be liable to CGT.
- Deduction on Wages and Employment Cost: By virtue of section 164 (3)(a) of the Tax Reform Bill, there is an introduction of a 50% additional deduction on costs incurred in any two calendar years from 2023 to 2025 on wage awards, salary increases, transportation allowance or transport subsidy granted to a low-income worker which brings the gross monthly remuneration of the worker up to an amount not exceeding ₦100,000.
Section 164 (3)(b) provides a 50% additional deduction on the salaries of any new employee constituting new employees hired in 2023 and 2024 calendar years over and above the average net employment in the three preceding years, provided that such new employees are not involuntarily disengaged within a period of three years post-employment. This will encourage employers to hire additional staff and reduce the unemployment rate.
- PAYE Tax Exemption for Armed Forces Engaged in Combatting Insecurity: Section 164 (1)(j) of the tax reform bill exempts wound and disability pension from PAYE tax for members of the armed forces or of any recognized national defence organization, or to a person injured as a result of enemy action.
Section 164 (1)(o) exempts the emoluments of any person serving as other rank, and other personnel serving in combat zones, hazardous areas or in designated operations, provided that where any other income accrues to the person, not being income by way of personal emoluments, that income shall be liable to tax.
This applies specifically to military personnel and recognized defence organizations, ensuring that their disability benefits and emolument remain untaxed. This provision will encourage the armed forces to discharge their duties bearing in mind that the financial compensation due to those who have sustained injuries or disabilities in the line of duty will be fully paid without being taxed.
- PAYE Tax Exemption for Income on Bond: Section 164 (1)(n) of the tax reform bill exempts income earned from bonds issued by a state or the Federal Government of Nigeria from PAYE tax.
This tax exemption makes government bonds more attractive, thereby encouraging individuals to invest in them rather than in other taxable investment instruments. Investors may prefer government bonds over other fixed-income securities or savings options that are still subject to taxation.
THE ROLE/OPPORTUNITIES PRESENTED TO LEGAL PRACTITIONERS
- Advise on Compliance and Regulatory Services: The introduction of the new reforms means an increase in the demand for legal services related to compliance and regulatory issues. Lawyers will be essential in guiding businesses and individuals on what the new tax Bill is all about and how to navigate the tax law and structure their businesses efficiently to ensure compliance and avoid penalties, thus creating a business opportunity for lawyers.
- Tax Dispute Resolution: The unification of the various existing tax laws into a more coherent and consolidated system has significant advantage for lawyers. A unified Tax law means that lawyers can quickly identify the applicable rules when briefed on tax-related matters, helping lawyers to conduct dispute resolution more efficiently and reducing the complexity involved in representing clients in tax-related matters. Lawyers will no longer have to navigate through a maze of different legislations which can occasion overlooking important provisions.
- Policy Analysis and Legislative Advocacy: Legal practitioners can play an important role in assessing the impact of tax reforms, providing input to policymakers, and lobbying for further legislative improvements. Also, lawyers can participate in public consultations, draft policy briefs, and engage with government agencies to shape future tax policies.
- International and Cross-Border Tax Advisory: As Nigerian businesses expand globally, legal practitioners are needed to advise on international tax obligations, double taxation treaties, and cross-border transactions. This involves setting up businesses and structuring investments to comply with both foreign and Nigerian tax regulations.
- Corporate Governance and Sustainability: Nowadays, tax experts are seen as essential contributors to organizational strategy, which includes sustainability reporting, corporate governance, and ESG (Environmental, Social, and Governance) compliance. Legal practitioners can assist in incorporating tax considerations into more comprehensive corporate plans and reporting structures.
CONCLUSION
Nigeria’s tax reforms aim to reshape the legal landscape, creating significant and diverse opportunities for legal practitioners. Aside the traditional compliance and conflict resolution, Legal practitioners increasingly play a key role in capacity building, digital transformation, policy advocacy, and strategic business consulting. To fully leverage these opportunities, legal practitioners must invest in continuous education, embrace technology, and actively engage with both clients and policymakers. This proactive approach will not only enhance their professional relevance but also contribute to the effective implementation and success of these Tax reforms.
