Personal income tax is regulated by the Personal Income Tax (Amendment) Act 2011 and it is an important source of revenue for both the federal and state governments in Nigeria. It is assessed on the income received by individuals. There are basically two types of personal income tax; the Pay-As-You-Earn (PAYE) and the direct assessment. The Pay-As-You-Earn (PAYE) is the most common type of personal income tax. Employers withhold it from employees’ pay and wages and remit same to the appropriate taxing authorities on their behalf. Direct Assessment on the other hand are for People who are self-employed or have various sources of income and they are responsible for calculating their taxable income and paying the relevant taxes to the tax authorities.
To determine the taxable income of an individual, certain deductions and exemptions are allowed from a variety of items, including wages, bonuses, allowances, rental income, dividends, interest, capital gains, and other types of income. Some of the deductions that are allowable under Nigerian tax regulations include the National Housing Fund (NHF) and the National Pension Scheme (PENCOM) payments. Taxable income may therefore be decreased by these deductions. It is also important to note that Nigeria operates a progressive personal income tax rate structure. Bigger earners pay a bigger percentage of their income in taxes, with rates varying depending on income level. Both the federal and state governments establish the tax rates.
The filing and payment procedure is dependent on the type of personal income tax. For the PAYE-eligible employees, they do not need to file individual tax returns because their employers take care of the deduction and remittance but this is not the same for the self-employed people as they are required to submit tax returns and pay taxes to the government directly. However, to encourage and promote economic growth and investment in particular sectors, certain businesses and investments may be eligible for tax incentives like Pioneer Status or investment tax credits which will ultimately reduce or waive the taxable income upon fulfillment of certain conditions.
Personal income taxes are being levied by both the state and federal governments, respectively, as Nigeria operates a dual system of taxation. Federal taxes are managed by the Federal Inland Revenue Service (FIRS), while state boards of internal revenue handle state taxes. These government agencies are also empowered by law to carry out tax audit to verify that the appropriate tax returns have been filed and in compliance with the provisions of the Personal Income (Amendment) Act, 2011. Where there is non-compliance, penalties, interest fees, or legal actions may be incurred. Take notice that tax evasion or avoidance in any form is illegal and punishable by law.
Finally, understanding and complying with personal income tax laws in Nigeria is important for individuals to meet their tax obligations and avoid legal issues. Hence, the need for tax authorities and organizations to provide taxpayer education programs to increase awareness and understanding of tax laws, compliance, and taxpayer rights and responsibilities.