Taxation of Personal Income: Ascertainments, deductions, and calculation

Introduction

The Nigeria Tax Act 2025 (NTA or the Act) has significantly changed the legal framework governing personal income taxation by introducing changes to the personal income tax rates, allowable deductions, remittance obligations, and the scope of tax administration. Under the new law, personal income taxation has become topical, considering that it is one of the most visible and directly felt aspects of Nigeria’s fiscal system, as it affects individuals (whether they be professionals, artisans, or entrepreneurs) and their livelihoods.

Given the above, there is a need for clarity to enable all those who are subject to taxation under the NTA to accurately ascertain chargeable income and allowable deductions, and to correctly compute annual taxes. This article, therefore, examines the key concepts of personal income tax under the new law and provides practical illustrations for calculating chargeable income and applicable taxes for both individuals in employment and those under self-assessment (i.e., not in formal employment).

Determining a person’s income

Aside from persons exempted by law, in Nigeria, tax is generally paid on income earned by a person who is resident or non-resident. Under the NTA, the total income of a person for a year of assessment consists of all income, profits, or gains accruing to or derived by that individual from taxable sources. These include, but are not limited to, gains from pensions, vocations, trades, salaries, and wages. The tax rate to be paid depends on a person’s total income.

The following represent the ways to determine a person’s income for the purpose of taxation:

Pay-As-You-Earn: Under the pay-as-you-earn, which applies to those in employment, the employer, who pays the salary, is mandated to remit the requisite taxes to the relevant tax authority after all relevant deductions (to be discussed in a subsequent section).

Self-Assessment: Individuals whose income does not arise from employment must self-assess. This means that all economic activities, including all dividends, investments, disposals, investment profits, prizes, bonuses, winnings, and others, must be self-assessed.

Presumptive Basis: A person’s trade, profession, vocation, or economic activity may be such that it is impracticable to ascertain their exact income. Where this is the case, the tax authority may assess such income on a presumptive basis, allowing for a reasonable estimate based on case-by-case circumstances.

Care should be taken when determining total income, as it serves as the basis for determining the appropriate tax to be paid. Understating total income may distort the tax payable, given that the law allows certain deductions.

Allowable Deductions

The NTA significantly narrowed the scope, abolishing the Consolidated Relief Allowance (CRA).  The CRA is 20% of your gross income plus either N200,000 or 1% of your gross. The income that is subject to tax is determined after the relevant deductions allowed by law are made. Section 30 of the NTA sets out allowable deductions from total income, which include:

a. contributions to the National Housing Fund;

b. contributions to the National Health Insurance Scheme;

c. individual pension contributions under the Pension Reform Act;

d. interest on loans for developing an owner‑occupied residential house;

e. insurance and life assurance premiums; and

f. 20% of annual rent paid, subject to a maximum of ₦500,000.

For incomes not earned from employment, allowable deductions consist of expenses wholly and exclusively incurred in the production of an individual’s income. The expenses include, but are not limited to, the interest paid on debts used in the production of income, repairs, rent paid to generate income, payments to employees, and losses contemplated by Section 28 (2)(b) of the NTA. However, all expenses are strictly those incurred in generating the income.

It is important to note that the deductions highlighted above are not granted automatically. The law requires taxpayers to submit written details of their deductions, and the tax authority retains discretion to request proof before approving such claims.  Accordingly, once the total income has been ascertained and allowable deductions applied, the balance constitutes the chargeable income upon which tax is levied.

Calculation and Rates of Individual Income

Sections 4 and 58 of the NTA have adjusted the tax rates. The applicable rates are as follows:

Annual Taxable Income (N)                     Tax Rates

First 800,000                                                           0%

Next 2,200,000                                                       15%

Next 9,000,000                                                       18%

Next 13,000,000                                                     21%

Next 25,000,000                                                     23%

Next 50,000,000                                                     25%

From the above, the first N800,000 is taxed at 0%. The implication is that individuals with an annual taxable income of N800,000 or less will be exempt from personal income tax. The respective tax rates will apply to the income above N800,000. Consequently, after the relevant deductions highlighted in the previous section are made to the total income, the various tax rates, in a progressive order, are applied to the outstanding income amount to determine the personal income tax.

Illustration

The first step is to deduct the annual pension allowance, the NHF, NHIS, rent allowance, and other deductibles. The annual pension contribution allowance is a minimum of 8% of the total emoluments. Emoluments are the total of basic salary, housing allowance, and transportation allowance. The NHF is 2.5% of basic salary, and the NHIS is 5% of basic salary. All these are to be first subtracted from the gross income before the taxes are calculated. In addition, the rent allowance is 20% of the annual rent or N500,000, whichever is lower. Accordingly, the chargeable income is as follows:

Chargeable Income = Total Income – (Pension Allowance + NHF + NHIS + Rent Allowance + Expenses + Other Allowances)

It should be noted that NHF and NHIS are often not mandatory contributions for employees under private employment. To calculate the annual tax, the chargeable income is taxed progressively at the applicable tax rates. Assuming the chargeable income of an individual is N15,000,000, the tax will be charged as follows:

First ₦800,000 at 0% = ₦0

Next ₦2,200,000 at 15% = ₦330,000

Next ₦9,000,000 at 18% = ₦1,620,000

Balance ₦3,000,000 at 21% = ₦630,000

Total annual tax payable = ₦2,580,000

To ascertain the applicable personal income tax, people are encouraged to use the tax calculator on the Presidential Fiscal Policy and Tax Reforms Committee’s

website. It is also advisable to consult tax experts for proper advice on tax liabilities and planning.

Duty to Remit Taxes

The NTA and the Nigeria Tax Administration Act 2025 (NTAA) impose an obligation on individuals to remit taxes and file their returns. It is important to note that individuals contemplated by law include employees, who must file an annual income tax return for all sources of income, including employment income. Consequently, taxable individuals are expected to register with the relevant tax authorities and obtain their individual tax ID. Failure to comply could result in fines covering the period of non-compliance.

As noted earlier, under the PAYE system, employers must deduct taxes at source and remit them to the tax authority before making net payments to employees. Both employers and employees must file a return with the relevant tax authority for all emoluments paid to employees not later than 31^st January of each year in respect of all employees in their employment in the preceding year. Failure in this regard may attract a penalty or may render the employer liable to pay interest on the sum not remitted in a particular year of assessment.

Those not under formal employment, including those in the gig economy, must self-assess and remit the taxes to the tax authority. Detailed disclosure of annual income, along with the filing of returns and documentary evidence to support and justify deductions, is required. The NTAA provides timelines to comply. Failure to comply may give the tax authority the discretion to issue a best-of-judgment (BOJ) assessment when returns are neither filed nor understated. To ensure compliance, especially for those earning substantial income from gig work, it may be necessary to engage tax experts.

Following an assessment of the chargeable tax by the authority, the taxable individual is expected to pay within 30 days of the assessment. Failure to file returns or the filing of inaccurate returns will attract an administrative fine of N100,000 for the first month and N50,000 for subsequent months. Also, failure to pay the tax as and when due attracts a fine equal to 10% of the amount due. This means the tax and the 10% fine will be charged for the period of default. Furthermore, the NTAA authorises the tax authorities to collect interest on taxes that a payer failed to pay.

Conclusion

The NTA and NTAA have introduced several changes affecting personal income. The laws have broadened the category of individuals liable for personal income tax, introduced new tax rates (including exemptions for low-income earners), and clearly outlined the deductions applicable to individuals’ income. The laws took effect on January 1, 2026, and are now in effect. This means that all those subject to the law should understand how their personal income is affected and ensure to comply accordingly.

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