How To Calculate Your Taxes In Nigeria

In Nigeria, understanding how to calculate your taxes is crucial for both individuals and businesses. Complying with tax regulations not only ensures that you avoid penalties but also contributes to national development. Nigeria operates a multi-tier tax system, where taxes are levied by federal, state, and local governments. This guide will provide a comprehensive overview of how to calculate taxes in Nigeria, with a focus on key taxes that individuals and businesses need to be aware of.

Understanding the Nigerian Tax System

The Nigerian tax system is governed by various laws, regulations, and agencies. Taxes in Nigeria can be broadly classified into two categories:

1. Direct Taxes: These are taxes levied directly on income, profit, or assets. Examples include Personal Income Tax (PIT), Companies Income Tax (CIT), and Capital Gains Tax (CGT).
2. Indirect Taxes: These are taxes levied on goods and services rather than income or profits. Examples include Value Added Tax (VAT), Customs and Excise Duties, and Stamp Duties.

Tax rates and laws differ depending on the taxpayer's status (individual or corporate), the state of residence, and the type of income earned.

Types of Taxes in Nigeria

1. Personal Income Tax (PIT)

   • Levied on the income of individuals, including salaries, wages, benefits, and profits from businesses.
   • Collected by the state governments through the State Board of Internal Revenue (SBIR) for residents, while the Federal Inland Revenue Service (FIRS) collects it from federal government employees and residents of the Federal Capital Territory (FCT).
   • Progressive tax system, meaning that higher income earners are taxed at higher rates.

2. Companies Income Tax (CIT)

   • Imposed on the profits of corporate entities operating in Nigeria, excluding those involved in petroleum operations (which pay Petroleum Profit Tax).
   • Collected by the FIRS.
   • The standard CIT rate is 30% of taxable profits, while companies with gross turnover less than ₦25 million pay CIT at a lower rate of 20%.

3. Value Added Tax (VAT)

   • An indirect tax levied on goods and services consumed in Nigeria.
   • The current VAT rate in Nigeria is 7.5%.
   • VAT is charged on all goods and services except those listed as exempt, such as basic food items, educational materials, and medical services.

4. Capital Gains Tax (CGT)

   • Levied on the profits from the sale or transfer of capital assets such as real estate, stocks, and bonds.
   • The CGT rate in Nigeria is 10% of the net gains from the disposal of such assets.

5. Withholding Tax (WHT)

   • An advance payment of income tax, deducted at source when certain payments are made to individuals or companies.
   • The WHT rates range from 5% to 10%, depending on the type of transaction and the taxpayer’s status.

Step-by-Step Guide to Calculating Your Taxes in Nigeria

1. Calculating Personal Income Tax (PIT)

Personal Income Tax in Nigeria is calculated based on a progressive tax rate system, which means that the tax rate increases as income increases. Here's how to calculate PIT:

Step 1: Determine your gross income
Gross income includes your salary, wages, bonuses, and other benefits-in-kind. For example, if your gross annual income is ₦3,000,000, this will form the base of your calculation.

Step 2: Apply tax-free deductions
Before applying tax rates, certain deductions can be made from your gross income. These include:

• Consolidated Relief Allowance (CRA): ₦200,000 or 1% of gross income, whichever is higher, plus 20% of the gross income.
• Pension Contributions: Employee contributions to pension funds are deductible.
• National Health Insurance Scheme (NHIS), Life Assurance Premiums, and other contributions approved by law.

Example:
Gross income: ₦3,000,000
CRA: ₦200,000 + (20% of ₦3,000,000) = ₦800,000
Pension Contribution (e.g., 7.5% of gross): ₦225,000
Total deductions: ₦1,025,000
Taxable income: ₦3,000,000 – ₦1,025,000 = ₦1,975,000

Step 3: Apply the tax rates
The progressive tax rates are as follows:

• First ₦300,000: 7%
• Next ₦300,000: 11%
• Next ₦500,000: 15%
• Next ₦500,000: 19%
• Next ₦1,600,000: 21%
• Above ₦3,200,000: 24%

For the taxable income of ₦1,975,000, the calculation would be:

• First ₦300,000 @ 7% = ₦21,000
• Next ₦300,000 @ 11% = ₦33,000
• Next ₦500,000 @ 15% = ₦75,000
• Remaining ₦875,000 @ 19% = ₦166,250

Total tax payable: ₦21,000 + ₦33,000 + ₦75,000 + ₦166,250 = ₦295,250

2. Calculating Companies Income Tax (CIT)

For companies, CIT is calculated as a percentage of taxable profits. Taxable profits are determined after deducting allowable expenses from the company's gross income.

Step 1: Determine the gross income
This includes revenue from sales, services, and any other income generated by the business.

Step 2: Deduct allowable expenses
Allowable expenses include costs incurred in generating revenue, such as wages, rent, utility bills, and other operational costs.

Example:
Gross income: ₦50,000,000
Allowable expenses: ₦35,000,000
Taxable profit: ₦50,000,000 – ₦35,000,000 = ₦15,000,000

Step 3: Apply the CIT rate
For large companies, the CIT rate is 30%.
CIT = 30% of ₦15,000,000 = ₦4,500,000

For small companies with a turnover of less than ₦25 million, the CIT rate is 20%. For those classified as micro businesses (turnover below ₦25 million), there may be exemptions.

3. Calculating Value Added Tax (VAT)

VAT is applied at the rate of 7.5% on the sales of goods and services. To calculate VAT, you need to:

Step 1: Determine the value of goods and services sold
Example: If a business sells goods worth ₦1,000,000, VAT would be calculated as:
VAT = 7.5% of ₦1,000,000 = ₦75,000

Step 2: Remit the VAT to the FIRS
The business is required to remit the VAT collected to the FIRS monthly.

4. Calculating Capital Gains Tax (CGT)

Capital Gains Tax is levied on profits from the sale of assets such as property, shares, and bonds.

Step 1: Determine the sale price of the asset
For example, if you sell a piece of land for ₦10,000,000.

Step 2: Deduct the cost of acquisition and associated expenses
If the land was originally purchased for ₦6,000,000, the net gain would be:
Net gain = ₦10,000,000 – ₦6,000,000 = ₦4,000,000

Step 3: Apply the CGT rate
The CGT rate is 10%.
CGT = 10% of ₦4,000,000 = ₦400,000

Filing and Payment of Taxes

• Personal Income Tax: Employees’ taxes are typically deducted at source through the Pay-As-You-Earn (PAYE) system. Self-employed individuals are required to file annual tax returns by March 31 of the following year.
• Companies Income Tax: Companies are required to file their tax returns within six months of the end of their financial year.
• VAT: VAT returns and remittances are due monthly, on or before the 21st of the following month.
• Capital Gains Tax: CGT returns must be filed when the asset is disposed of, and the tax is payable within a reasonable time thereafter.

Conclusion

Calculating your taxes in Nigeria may seem complex, but understanding the various tax types and how they apply to you can make the process much easier. Whether you're an individual or a business owner, being aware of the relevant tax rates, deductions, and filing deadlines will ensure that you remain compliant with Nigerian tax laws. For specific tax calculations or complex cases, consulting with a tax professional or accountant is always recommended to ensure accuracy and compliance.