The Personal Income Tax is governed by the Personal Income Tax Act Cap P8 LFN 2004. The tax is a statutory obligation imposed by the Federal Government on the income of individuals, communities, and families as provided by Section 1 of the Act. Although the tax is a Federal obligation, it is however paid to the State Inland Revenue Service where the individual resides. Taxes are compulsory contributions to state revenue imposed and levied by the government to both individual’s income and company’s profit or added to the cost of goods or services in Nigeria by the Federal Inland Revenue Services (FIRS). The Taxes payable to the Federal Government are administered by the FIRS to generate revenue for the Nigerian economy.
Personal Income Tax remitted to the FIRS is only applicable to the staff of the Ministry of Foreign Affairs, foreigners outside Nigeria but earning income in Nigeria, police officers, and the military officers.
Generally, taxpayers are usually categorized according to the legal status of their businesses which includes the following:
- Individuals/Enterprises: This is usually sole proprietorship or self-employed business owners taxed to pay tax in his name or in the name of his agent. Individuals are assessed to pay income tax under the Personal Income Tax Act (PITA) 2004.
- A Partnership: An association of two or more individuals coming together in business with a sole view to make a profit. This type of business is assessed to pay income tax under the Personal Income Tax Act (PITA) 2004 in the same manner as individuals/enterprise. However, FIRS administers Value Added Tax for this category of business. In Nigeria, Partners are assessed in their individual names, based on their share of partnership profits allocated to each of them.
There are two (2) types of ways of paying Personal Income Tax;
- Pay-as-you-earn (PAYE)- for this category of PIT is provided under Section 81 of the Act, the tax is deducted from the salary or wages of the employee by the employer and further remitted to the appropriate tax authority. The payment is made on the 10th day of every month while the deadline for remittance is the 31st of January of the succeeding year.
- Direct Assessment- this category of tax is applicable to sole proprietors (self –employed) individuals. The tax is filed from the income earned in the preceding year without notice or demand from the relevant tax authority. The deadline for remittance is the 31st of January of the succeeding year.
The rate of personal income tax payable is dependent on the amount of taxable income that the payer is liable for. Section 3 of the PITA provides that tax shall be payable for each year of assessment on the aggregate amounts each of which is the income of every taxable person, for the year, from a source inside or outside Nigeria, including without restricting the generality of the foregoing-
- Gain or profit from any trade, business, profession or vocation, for whatever period as long as trade, business, profession or vocation have been carried on or exercised;
- Any salary, wages, fee, allowance or other gain or profit from compensations, bonuses, premiums, benefits or other perquisites allowed, given or granted by any person to any temporary or permanent employee other than so much of any sums as or expenses incurred by him in the performance of his duties, and from which it is not intended that the employee should make any profit or gain;
- Gain or profit including any premium arising from a right granted to any other person for the use or occupation of any property;
- Dividend, interest, or discount;
- Any pension, charge, or annuity;
- Any profit or other payment not falling within paragraph (a) to (e).
Income exempted from Personal Income Tax
Section 19 of the Act provides for the income exempted from paying Personal Income Tax in Nigeria. These are the income of persons or class of persons in pursuance of-
- Any treaty, convention, or agreement between the Federal Government of Nigeria and any other country or any other arrangement with or decisions of an international organization of which the Federal Government is a member or;
- An arrangement in that behalf subsisting between the Government of the Federation and Government of each State.
To determine the tax rate to be paid, the simplified calculation is on the Income- Expenses and Deductions = Taxable Income, Taxable Income/ Tax RATE = Tax Due. It is paid as PAYE (Pay as You Earn) by people in employment, whose employer deducts the tax at source and the option of self-assessment by self-employed individuals, paid directly to the tax authorities.
Below are the schedule of chargeable income and the rate of tax to be paid.
|Annual Income||Personal Income Tax Rate|
However, the maximum tax payable by any individual regardless of the income is 19.2% of the gross income. Taxable persons are entitled to a consolidated relief allowance of 20% of gross income plus a higher of 1% of gross income or N200, 000 (Two Hundred Thousand Naira), whichever is higher.
Tax Clearance Certificate
Section 85 of the Act states that whenever the relevant authority is of the opinion that tax assessed on the income of a person for the three years immediately preceding the current year of assessment has been fully paid or that no tax is due on the income or that the person is not liable to tax for any of those three years, it shall issue a tax clearance certificate to the person within two weeks of demand for the certificate by the person or give reasons for the denial, so however, that the payment of current year tax shall not be made a condition for the issuance of the certificate unless the applicant is leaving the country finally.
A person who gives false or incorrect information for the purpose of obtaining the tax clearance certificate is guilty of an offence and is liable on conviction to a fine of N500 plus twice the tax payable by him or to imprisonment for three years or both, as provided under Section 85 (7) of the Act.
There are consequences for failure to pay the personal income tax in Nigeria. Any individual who defaults in paying his personal income tax shall be liable on conviction to a fine of N5, 000 (Five Thousand Naira) and a further sum of N100 for every day during which the failure continues or an imprisonment of six (6) months or both. While, in the case of an employer who fails to remit the personal income tax of his employee, shall be liable on conviction to a penalty of N500,000 (Five Hundred Thousand Naira) or body corporate and N50,000 (Fifty Thousand Naira) for individuals.