Proposed income tax bill: how much tax you might pay?

The Nigerian government is considering new fiscal reforms, including a proposed income tax bill that could alter the amount of tax deducted from your salary. Understanding these potential changes is crucial for every employee in Nigeria to effectively manage their personal finances and prepare for the future. This bill aims to revise the existing tax structure to boost government revenue and align with the nation’s current economic realities.

This article provides a detailed analysis of the proposed income tax changes. It is designed for all salaried individuals in Nigeria, from those just starting their careers to seasoned professionals. We will break down the current tax system, explore the key features of the proposed bill, and demonstrate with practical examples how your take-home pay might be affected. By understanding these proposals, you can better anticipate their impact on your finances and make informed decisions.

Understanding the Current Personal Income Tax (PAYE) System in Nigeria

Before delving into the proposed changes, it’s essential to understand the current framework for personal income tax in Nigeria. The system in place is the Pay-As-You-Earn (PAYE) system, which is governed by the Personal Income Tax Act (PITA). Under this system, employers are legally required to deduct income tax directly from their employees’ salaries and remit it to the respective State’s Internal Revenue Service.

Key Components of the Current PAYE System

The amount of tax an individual pays is not calculated on their entire salary. Certain reliefs and deductions are allowed by law to arrive at a “taxable income.”

1. Gross Income: This is the total amount of an employee’s earnings before any deductions. It includes basic salary, allowances (housing, transport, etc.), bonuses, and any other benefits in kind.

2. Statutory Deductions (Reliefs): PITA allows for certain deductions from the gross income to reduce the tax burden. The most significant are:

• Pension Contributions: The mandatory 8% of an employee’s salary (basic, housing, and transport) contributed to a pension fund is tax-deductible.
• National Housing Fund (NHF) Contributions: The 2.5% of an employee’s basic salary contributed to the NHF is also deductible.
• National Health Insurance Scheme (NHIS) Contributions: Contributions made to the NHIS are tax-deductible.
• Life Assurance Premiums: Premiums paid on life insurance policies for the individual or their spouse are deductible.

3. Consolidated Relief Allowance (CRA): This is the largest relief available to taxpayers. The law provides for a CRA, which is the higher of:

• A flat N200,000 per annum.
• 1% of the annual gross income.

PLUS an additional 20% of the annual gross income. This combined amount is subtracted from the gross income (after other statutory deductions) to determine the final taxable income.

4. Taxable Income: This is the amount left after all the above reliefs and deductions have been subtracted from the gross income. It is this income that is subject to tax.

Current Income Tax Rates in Nigeria

The taxable income is taxed based on a graduated scale, meaning different income levels are taxed at different rates. The current tax brackets are as follows:

• First N300,000 of taxable income is taxed at 7%.
• Next N300,000 is taxed at 11%.
• Next N500,000 is taxed at 15%.
• Next N500,000 is taxed at 19%.
• Next N1,600,000 is taxed at 21%.
• Any income above N3,200,000 is taxed at 24%.

The Proposed Income Tax Bill: What Could Change?

The Nigerian government, through various fiscal policy documents and finance bills, has signalled its intention to reform the tax system. The primary goals are to increase revenue to fund public services and infrastructure, simplify the tax code, and ensure a more equitable distribution of the tax burden. While a definitive, all-encompassing bill with finalised details is still subject to the legislative process, the discussions and proposals point towards several key areas of change for personal income tax.

Potential Key Changes Under the New Proposal of Tax Bill

The proposed reforms are expected to touch on the very core of the PAYE calculation, potentially affecting tax rates, reliefs, and the definition of taxable income.

1. Alteration of Tax Brackets and Rates:

• Potential for Higher Rates: To generate more revenue, the government may consider increasing the tax rates for middle and high-income earners. The top rate could see an increase from 24% to a higher figure.
• Adjustment of Brackets: The income thresholds for each tax bracket could be adjusted. This could mean that individuals might find themselves in a higher tax bracket even if their salary has not increased significantly.

2. Review of the Consolidated Relief Allowance (CRA):

• The CRA is one of the most significant factors reducing an individual’s tax liability. A key proposal being considered is the removal or substantial reduction of the CRA. The government may argue that this allowance disproportionately benefits high-income earners. Removing the 20% of gross income component would drastically increase the taxable income for all employees, leading to a higher tax bill.

3. Introduction of New Levies and Taxes:

• There is a possibility of introducing new, specific levies that are deducted at source. These could be tied to social security, education, or housing. For instance, a mandatory housing levy or an increased social security contribution could be implemented, which would reduce an employee’s net take-home pay.

4. Harmonisation of Taxes:

• The reforms aim to streamline various taxes. This could involve consolidating different state and federal levies into a more straightforward structure. While this might simplify tax administration, it could also result in a higher overall tax burden if existing reliefs are removed in the process. For any business owner, staying informed on these changes is as vital as for an individual, as highlighted in this guide on understanding taxes for SMEs in Nigeria.

Calculating the Impact: Current Tax Bill vs. Proposed Tax Scenarios

To understand the real-world impact of these proposed changes, let’s analyse a few hypothetical scenarios. For this illustration, we will model a “proposed system” where the top tax rates are slightly increased and, most importantly, the 20% of gross income portion of the Consolidated Relief Allowance is removed.

Assumptions for our “Proposed System” model:

• The 20% of gross income component of the CRA is eliminated. Only the base relief (higher of N200,000 or 1% of gross income) remains.
• Tax rates for higher brackets are increased slightly.
• Standard deductions for pension (8%) and NHF (2.5% of basic) still apply. For simplicity, we assume Gross Income is the basis for pension contribution.

Scenario 1: Junior-Level Employee

• Monthly Gross Salary: N150,000
• Annual Gross Salary: N1,800,000

Current Tax Calculation:

1. Gross Income: N1,800,000
2. Deductions:
   • Pension (8%): N144,000
   • Consolidated Relief Allowance (CRA):
     • Base (1% of Gross): N18,000
     • 20% of Gross: N360,000
     • Total CRA: N200,000 (as N200k is higher than N18k) + N360,000 = N560,000
3. Total Deductions: N144,000 + N560,000 = N704,000
4. Taxable Income: N1,800,000 – N704,000 = N1,096,000
5. Tax Calculation:
   • First N300,000 @ 7% = N21,000
   • Next N300,000 @ 11% = N33,000
   • Remaining N496,000 @ 15% = N74,400
6. Total Annual Tax (Current): N128,400
7. Monthly Tax (Current): N10,700

Proposed Tax Calculation (Illustrative):

1. Gross Income: N1,800,000
2. Deductions:
   • Pension (8%): N144,000
   • New CRA (20% portion removed): N200,000
3. Total Deductions: N144,000 + N200,000 = N344,000
4. Taxable Income: N1,800,000 – N344,000 = N1,456,000
5. Tax Calculation:
   • First N300,000 @ 7% = N21,000
   • Next N300,000 @ 11% = N33,000
   • Next N500,000 @ 15% = N75,000
   • Remaining N356,000 @ 19% = N67,640
6. Total Annual Tax (Proposed): N196,640
7. Monthly Tax (Proposed): N16,387

Impact: The monthly tax for this employee would increase by approximately N5,687, a significant amount for someone at this income level.

Scenario 2: Mid-Level Manager

• Monthly Gross Salary: N600,000
• Annual Gross Salary: N7,200,000

Current Tax Calculation:

1. Gross Income: N7,200,000
2. Deductions:
   • Pension (8%): N576,000
   • Consolidated Relief Allowance (CRA):
     • Base (1% of Gross): N72,000
     • 20% of Gross: N1,440,000
     • Total CRA: N200,000 (higher of N200k/N72k) + N1,440,000 = N1,640,000
3. Total Deductions: N576,000 + N1,640,000 = N2,216,000
4. Taxable Income: N7,200,000 – N2,216,000 = N4,984,000
5. Tax Calculation:
   • First N300,000 @ 7% = N21,000
   • Next N300,000 @ 11% = N33,000
   • Next N500,000 @ 15% = N75,000
   • Next N500,000 @ 19% = N95,000
   • Next N1,600,000 @ 21% = N336,000
   • Remaining N1,784,000 @ 24% = N428,160
6. Total Annual Tax (Current): N988,160
7. Monthly Tax (Current): N82,347

Proposed Tax Calculation (Illustrative):

1. Gross Income: N7,200,000
2. Deductions:
   • Pension (8%): N576,000
   • New CRA (20% portion removed): N200,000
3. Total Deductions: N576,000 + N200,000 = N776,000
4. Taxable Income: N7,200,000 – N776,000 = N6,424,000
5. Tax Calculation (with slightly higher illustrative rates):
   • First N300,000 @ 7% = N21,000
   • Next N300,000 @ 11% = N33,000
   • Next N500,000 @ 17% (+2%) = N85,000
   • Next N500,000 @ 21% (+2%) = N105,000
   • Next N1,600,000 @ 24% (+3%) = N384,000
   • Remaining N3,224,000 @ 27% (+3%) = N870,480
6. Total Annual Tax (Proposed): N1,498,480
7. Monthly Tax (Proposed): N124,873

Impact: The monthly tax for this manager would increase by approximately N42,526. This demonstrates that the removal of the CRA has a much larger effect on higher incomes.

Why is the Government Proposing These Tax Bill Changes?

The push for tax reform is driven by a combination of economic pressures and strategic goals. Nigeria, like many nations, is navigating a challenging economic landscape that necessitates difficult policy choices. Understanding the government’s perspective provides context for these proposed changes.

1. Increasing Government Revenue: The primary driver is the need to increase non-oil revenue. With volatility in global oil prices, relying on oil exports is no longer a sustainable strategy for funding the national budget. Broadening the tax base and increasing compliance are seen as essential for financing public services like healthcare, education, and infrastructure.

2. Addressing Budget Deficits and Debt: The government has been running budget deficits for several years, leading to increased borrowing. The revenue generated from these tax reforms would be used to service national debt and reduce the deficit, aiming for a more stable fiscal position.

3. Promoting Equity and Fairness: Proponents of the reforms argue that the current system, particularly the Consolidated Relief Allowance, provides excessive benefits to high-income earners. By restructuring reliefs, the government aims to create what it considers a more equitable system where the tax burden is distributed more fairly across different income levels.

4. Economic Realities: The current economic climate, marked by high inflation, puts immense pressure on household incomes. While higher taxes may seem counterintuitive, the government’s position is that these measures are necessary sacrifices to prevent a more severe economic crisis. These are undoubtedly tough times, and finding ways of surviving Nigeria’s economic hardship is paramount for every household.

How to Prepare for the Potential Tax Changes

While these changes are still proposals, their potential impact is significant enough to warrant proactive preparation. Being prepared can help mitigate the financial shock and ensure a smoother transition if and when the new tax system is implemented.

1. Stay Informed: Keep up-to-date with news from reliable sources regarding the progress of any finance or tax bill through the National Assembly. Pay attention to discussions about changes to PITA, tax rates, and allowances.

2. Review and Adjust Your Budget: This is the most critical step. A reduction in your take-home pay requires a corresponding adjustment in your spending. Use the illustrative calculations above to estimate your potential new net income and see how it affects your budget. Identify areas where you can cut back on expenses.

3. Focus on Financial Planning: Now is the perfect time to get serious about your financial health. A solid financial plan can provide a roadmap to navigate these changes. If you don’t have one, consider creating your personal financial plan to map out your income, expenses, savings, and investment goals. This will give you clarity and control over your money.

4. Build or Boost Your Emergency Fund: An emergency fund, typically covering 3-6 months of living expenses, is a crucial buffer against financial shocks. If your take-home pay is reduced, having a robust emergency fund will provide peace of mind and prevent you from going into debt for unexpected costs.

5. Seek Professional Advice: If you find the tax laws complex or are unsure how they apply to your specific situation, consider consulting with a qualified financial advisor or tax professional. They can provide personalised advice based on your income, investments, and financial goals.

6. Understand Your Payslip: Take the time to thoroughly understand every line item on your payslip. Know your gross pay, each deduction, and how your net pay is calculated. This knowledge will empower you to spot any discrepancies and understand exactly how new tax laws are affecting you when they are implemented.

In conclusion, the proposed income tax bill represents a potentially significant shift in personal finance for every salaried worker in Nigeria. While the final details remain to be seen, the direction of the reforms—towards higher revenue generation through reduced reliefs and potentially higher rates—is clear. By understanding the current system, analysing the potential impact, and taking proactive financial planning steps today, you can better position yourself to navigate the changes ahead with confidence and resilience.

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