PERSONAL INCOME TAX IN NIGERIA. SELF ASSESSMENT AND PAYE

By on December 24, 2010

Personal Income Tax

What is PIT?

PIT is Personal Income Tax. It is a tax that is imposed on individuals who are

either in employment or are running their own small businesses under a

business name or partnership.

Though collection of PIT is a federal responsibility this tax is generally collected

by state governments from those that are resident in their various states,

regardless of whether they are federal, state, local government, or private

sector workers.

The Federal Inland Revenue Service, however, also collects this tax but only

from residents of the Federal Capital Territory as well as what may be

described as highly mobile federal workers – staff of the Ministry of Foreign

Affairs and other Nigerians and foreigners outside the country but earning

income in Nigeria (non-residents), expatriate workers resident in Nigeria,

Police Officers, and Military Officers. Civilians working in Police and Military

formations, however, pay to their respective States of residence.

The current law guiding the taxation of personal incomes is the Personal

Income Tax Act (Cap P8 LFN 2004). Under the law, Federal and States’ tax

boards are empowered to identify persons living in or earning income from

Nigeria who are required to pay tax, and to assess incomes and tax their

incomes using specified guidelines and rules.

This law also guides the tax official in identifying the residence of potential

taxpayers, as well as the sources and origins of their incomes for the purpose

of taxing the income.

 

 

 

 

 

 

 

 

 

Two forms of PIT

Two forms of taxes are administered under Act, namely

(a) Pay-As-You-Earn (PAYE) i.e. taxes from employment, and

b) taxes from self employed persons.

A. Pay-As-You-Earn

PAYE TAX DEDUCTION GUIDE

 

This PAYE Tax Deduction Guide has been prepared to guide Taxpayers in filing

their Annual Tax returns and to prepare their Income Tax computations.

2.       All taxable persons are required to file their tax returns within 90 days

from the beginning of every year and include the amount of tax payable.

3.       The Personal Income Tax Act No 104 of 1993 in Section 3(1) lists Incomes

that are chargeable to Tax as:-

• Gain or Profit from any trade, business, profession or vocation for whatever

period of time such trade, business, profession or vocation may have been

carried on or exercised;

• Any salary, wage, fee, allowance or other gain or profit from employment

including gratuities, compensations, bonuses, premiums, benefits or other

perquisites allowed, given or granted by any person to an employee.

Based on the above provisions of the Law, all Incomes earned by an Individual

are liable to be assessed to Tax subject however to the exemptions granted

under section 3(1) b (i to xiii) as amended. The details of these exemptions are

as stated hereunder:-

4.                Exempted Allowances

 

i.       Rent Allowance                  -       Maximum of N150,000 per annum.

ii.      Transport Allowance         -       Maximum of N20,000 per annum.

iii.     Utility Allowance               -        Maximum of N10,000 per annum.

iv.      Meal Allowance                -        Maximum of N5,000 per annum.

v.       Entertainment Allowance-   Maximum of N6,000 per annum.

vi.      Leave Allowance                -        10% of Basic Salary per annum.

vii.     Disability Allowance -        10% of Earned Income or N3,000

whichever is lower.

5.                The Tax Reliefs

i.       Personal Allowance   -        20% of Earned Income + N5,000.

ii.      Children Allowance   -        N2,500 per child for maximum of

4 Children.

iii.     Dependant Relative Allce-    N2,000 per Dependant.

iv.      Life Assurance                   -        100% of sum paid (Evidence to

be submitted before this relief can be

granted).

v.            Interest on Loan in respect of Owner Occupier premises – 100%

Subject to approval of the Board (FIRS).

vi.      Pension contribution           -        100% of sums paid.

6.       Minimum Tax Provision

The minimum tax rate payable is 0.5% for any emoluments below N30, 000 per

annum earned by an individual in one fiscal year.

7.       Chargeable Income then becomes taxable at the following rates:

1 N30,000 @ 5%

Next N30,000 @ 10%

Next N50,000 @ 15%

Next N50,000 @ 20%

Above N160,000 @ 25%

8.       The Federal Inland Revenue Service seeks the co-operation of all

Taxpayers as filing of their annual tax return is a mandatory requirement under

the Personal Income Tax Act Cap. P8 LFN 2004.

B.  taxes from self employed persons.

 

Who Collects Personal Income Tax?

Every individual who earns income in Nigeria either from employment or from

doing a business is subject to tax under the PIT Act.

(a) State Boards of Internal Revenue collect taxes of

• individuals in their various states of residence

• Body of individuals such as communities, families that run a business

• Business names and partnerships;

• Executors of estates of deceased persons and trustees of trusts.

(b) Federal Inland Revenue Service also collects Personal Income Taxes of

• Persons employed in the Nigerian Army, the Nigerian Navy, the Nigerian Air

Force and the Nigerian Police other than in a civilian capacity;

• Officers of the Nigerian Foreign Service;

• Non-residents who derive income or profit from Nigeria.

 

Who is exempted from this Tax?

The law exempts the following incomes from tax:

• Official emoluments of the President, Vice President, State Governors and

Deputy Governors;

• Income of any Trade Union registered under the Trade Union Act, provided

such income is not derived from a trade or business carried on by such Trade

Union;

• Income of any Statutory or registered Friendly Society in so far as such

income is not derived from a trade or business carried on by such Society; and

• Income and profits of Cooperative Societies.

 

Which parts of a person’s income are subjected to Tax?

Tax is calculated for each year of assessment on the aggregate amounts of the

income of every taxable person, for the year. The following incomes are

subject to tax under the law:

a. Gains or profits from any trade, business, profession or vocation for

whatever period of time it may have been carried on by the taxable person;

b. Dividends, interests or discounts

c. Any pension, charge or annuity

d. The gains or profits including any premiums arising from a right granted to

any other person for the use or occupation of any property

 

What expenses can I deduct before paying personal income tax?

In calculating income tax, the law allows deduction of all expenses and

outgoings from emoluments of the fiscal year in which they are incurred, on

the condition that they are:

• incurred in the production of income i.e. the performance of duties and

• “wholly, exclusively, necessarily and reasonably” so incurred

 

Which are the Allowed & Disallowed Expenses?

The law allows certain expenses but disallows others. Expenses specifically

allowed under the law in calculating income tax include:

• Interest paid on borrowed money employed as capital in acquiring the

income;

• Rent and premiums in respect of land and buildings occupied for the

purposes of acquiring profits;

• Expenditure on repairs of premises, plant, machinery and fixtures and for the

renewal, repair or alteration of such items used in acquiring income;

• Bad and doubtful debts, any recoveries being treated as income when

received;

 

A list of disallowed trading expenses include: -

• Domestic or private expenses;

• Capital withdrawn from a trade, business, profession or vocation and any

expenditure of a capital nature;

• Any loss or expense recoverable under an insurance or contract of indemnity

• Taxes on income or profits levied in Nigeria or elsewhere except as provided

in s.13 of the PITD.

• The depreciation of any asset.

 

What Reliefs & Allowances are available under PIT?

With effect from 1 January 1999, the following reliefs and allowances were

incorporated in the law.

• Tax Free Earned Income: Annual income of N 30,000 and below is exempted

from tax, although a minimum tax of 0.5% will be charged.

• Tax Free Allowances: The following allowances which have been granted

under the recent salary reviews will be tax exempt subject to the following

limitations:

 

Allowable Allowances  Upper limit of Tax Exemption (N)

i. Rent subsidy/Allowance N150,000 Per annum

ii. Transport Allowance N15,000 Per annum

iii. Meal subsidy/Allowance N5,000 Per annum

iv. Utility Allowance N10,000 Per annum

v. Entertainment Allowance N6,000 Per annum

vi. Leave Grant 10% of annual basic salary

 

Personal Income Tax Rate Structure as at 1st January 1998

Taxable Income (N) Rate (% )

First  30, 000        @       5

Next  30, 000        @     10

Next  50, 000        @     15

Next  50, 000        @     20

Over 160, 000        @    25

 

How to pay PIT

The law requires a taxable person to file the returns of income or a declaration

of his annual income/remuneration for the current year with the relevant Tax

Authority where he is resident. For each year of assessment, you are required

to file a return of income in the prescribed form and containing necessary

information, with the relevant Tax authority where the taxable person is

deemed to be resident. This return is to be accompanied by a true and correct

statement in writing containing:

a) the amount of income from every source during the year preceding the year

of assessment,

b) such particulars as may be required for the purpose of the Act with respect

to any such income, allowances, reliefs, deductions etc.

c) a declaration by him or on his behalf that the return contains a true and

correct statement of the income disclosed on the form, in accordance with the

provisions of the Act.

 

Where to Pay PIT (FIRS jurisdiction only)

The FIRS has jurisdiction over the taxation of all individuals in employment

including self-employed persons and enterprises resident in FCT – Abuja.

Accordingly, all taxable persons, self employed/enterprises in the FCT are

obliged to file annual PIT/PAYE returns with the FIRS at any of the following

Integrated tax offices located within Abuja – FCT based on the approved areas

of coverage:

S/N Offices Assigned to Collect PTI/PAYE Functional Coverage

SOURCE FIRS

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