By MICHAEL CHIBUZO

As the countdown to the January, 2026 effective take off of two landmark Tax Reform laws gathers steam, wrong narratives and misconceptions about aspects of the new tax laws have also been on the increase. While some of the misconceptions are borne out of innocent ignorance, others are mostly from a place of political mischievousness. In this Explainer I will be addressing the misconceptions around the income tax provisions in the Nigeria Tax Act, 2025.

Over the past couple of months, I have noticed the following misconceptions and wrong narratives around the issue of income tax, many of which emanate from individuals or businesses who have clearly been evading income taxes:

1. Nigerians pay higher income taxes from January 1, 2026

2. Money in individual bank accounts would be automatically taxed by the government

3. Federal government is desperate to raise revenue by taxing the income of Nigerians heavily.

4. Tax laws will stifle productivity

I will briefly touch on each of these misconceptions, providing clarifications in layman terms.

1. HIGHER OR LOWER INCOME TAXES FOR INDIVIDUALS?

The reality is that the income tax paid by MAJORITY of Nigerians will reduce following the new personal income tax provisions in the Nigerian Tax Act, 2025 that exempted individuals earning N800,000 and below per annum from paying income tax. What this means is that Nigerians earning minimum wage or below will pay zero income tax.

I understand some will argue that minimum wage is N70,000 per month, which translates to N840,000 per annum and ordinarily means a minimum wage earner still has N40,000 above the N800,000 exemption threshold that is subjected to an income tax of 15% under the new tax law. That is correct, but here is the catch, there is what is called TAXABLE INCOME and is not necessarily equivalent to the total income of an individual.

Taxable income is simply the part of the total income that can be taxed after allowable deductions have been made. Under the NTA 2025, you can deduct the following from your GROSS income to get your TAXABLE income:

a) NHIS contribution (5% of salary for most employees)

b) Annual rent (corresponding to 20% of the rent up to a maximum of N500,000)

c) National Housing Fund deduction (2.5% of gross pay)

d) Employee Pension contribution (8% of employee salary)

e) Life insurance premium for you and your spouse

In other words, a minimum wage earner claim some or all of these deductions and these will certainly drive down the taxable income within the exemption threshold of N800,000 per annum.

Let us do a practical calculation for an individual earning N70,000 monthly (minimum wage) who pays an annual rent of N200,000 in addition to NHIS, NHF and contributory pension deductions.

His gross annual income = N840,000

Pension contributions = N67,200

NHF deduction = N21,000

NHIS deduction = N42,000

20% of Annual Rent = N40,000

By the time you make these allowable deductions from the N840,000 gross income, the individual's TAXABLE INCOME becomes N710,800. This falls well within the exemption threshold which means the individual will not pay any income tax.

If an individual earns N80,000 monthly, and we use similar deductions for NHIS, NHF and CPS while raising annual rent to N300,000 with 20% amounting to N60,000, the individual will still be exempt from paying income tax as the taxable income would be N799,200 - within the N800,000 tax exemption threshold. Even when we calculate for an individual earning an annual gross income of N1.2m, the individual may even fall within the tax exempt status depending on the deductions he or she claims or at worst the individual may just be taxed an effective tax rate of 2.5% under the new law as against 4.6% under the old law.

The tax band is progressive in nature and only makes the rich with reasonably much higher annual gross income to pay a little more than before, which is a fair system. Although, depending on the deductions they may claim, they can end up paying lesser income tax than before. This in itself opens a lot of opportunities for the economy especially the life insurance sector as well as the health sector since one can actually sign up for health insurance and/or life insurance in order to pay lesser income tax while at the same time benefiting from quality all-round cheaper healthcare offered by the NHIS for the family.

Below is a demo tax calculation for an individual earning an annual gross income of N50 million. The individual lives in an apartment he purchased with a bank loan of N80 million at an annual interest rate of 27% with a five year tenor, making his annual interest payment to be approximately N4.32 million. This particular individual also makes N5 million contribution towards his pension and another N2.5 million NHIS contribution that covers himself, his spouse and four kids.

After deducting N5 million pension contributions, N2.5 million NHIS contribution and N4.32 million interest payment, his taxable income out of the N50 million gross income becomes just N35.18 million. However, this N35.18 million is not taxed a flat rate of 23% (under the old law, income above N3.2 million is taxed a flat rate of 24%), rather it is progressive - the first 800k is 0%, next N2.2m is taxed at 15%, next N9m is taxed at 18%, next N13m is taxed at 21% while the next N25m is taxed at 23%.

The income tax of this individual under the new tax laws is N7.02 million, which is basically 14.0% of his gross income - just 1.1% higher than his effective tax rate under the old laws. This is still by far very fair when you consider what is obtainable in many other countries of the world where effective tax rate can get to as high as 60% of taxable income.

2. WILL INCOME TAX BE AUTOMATICALLY DEDUCTED FROM BANK ACCOUNTS?

The simple answer is NO. Taxes would not be automatically deducted from the bank account of Nigerians.

This misconception is probably because of the provisions in section 29 of the Nigeria Tax Administration Act which mandates banks and other financial institutions to furnish the tax authority on a quarterly basis information (name and addresses) about their customers with cumulative monthly transactions of N25 million and above for individuals or N100 million and above for a body corporate. Even though the information will help a tax authority know those ELIGIBLE taxpayers evading taxes, the provision does not amount to automatic deduction of taxes from the accounts.

Crucially, if your monthly cumulative transactions as an individual does not amount to N25 million and above or from N100 million for corporate bodies, this provision does not concern you in any way. Only about 5% of the population have bank accounts that have more than half a million in them. So, in essence, more than 90% of Nigerians, which includes all the poor and vulnerable people in Nigeria are not affected by this provision.

3. IS THE FEDERAL GOVERNMENT DESPERATE TO RAISE REVENUE BY TAXING THE INCOME OF NIGERIANS HEAVILY?

Again, the simple and short answer is NO!

The reforms in the income tax laws are not particularly meant for the federal government to raise more revenue by taxing Nigerians heavily, the reverse is actually the case. The tax laws are meant to relieve poor Nigerians of tax burden. Meanwhile, the greatest beneficiary of personal income tax revenues are the states because Section 3(2) of the Nigeria Tax Administration Act confers jurisdiction on the state tax authority in respect of tax on the income, profit or gains of individuals residing in a state. Therefore, personal income tax is part of the IGR sources of state governments.

The FG only retains income taxes from personnel of the armed forces and personnel of the Nigerian Foreign Service in addition to non-residents (those not living in Nigeria) who derive income or profit from Nigeria. Under the new tax laws, the FG has even exempted members of the armed forces from paying income tax. So, the federal government cannot raise revenue from the income of civilians living in Nigeria as that is the exclusive preserve of the states.

Also, the fact that the tax laws exempted Nigerians earning below N800,000 per annum from income tax shows that the tax laws are not necessarily about raising revenues but reducing tax burden on Nigerians so that they can have more disposable income. The tax laws simply tried to focus on increasing tax compliance by the high income earners with the state governments being the ultimate beneficiary in any case.

4. WILL THE TAX LAWS STIFLE PRODUCTIVITY?

Definitely NOT!

The new tax laws are primarily meant to boost productivity and not stifle it. This is not difficult to prove. First, the wide range of exemptions for both individual taxpayers and small businesses clearly indicates an intention to bring relief to low income individuals and small businesses. Section 56 of the Nigeria Tax Act pegs the income (profit) tax rate for small businesses at 0%.

In section 147 (page 331) of the Nigeria Tax Administration Act, a small company is defined as a company with an annual gross turnover of N100m or less and with total fixed assets not exceeding N250m. This is basically 90% of businesses in Nigeria. A tax law that exempts over 90% of businesses in the country from paying profit tax cannot be stifling productivity under any circumstances!

In fact the same section 56 of the Nigeria Tax Act pegs the profit tax rate for larger companies at 30% with a proviso that this rate shall be REDUCED to 25% from a date to be determined in an order issued by the President on the advice of the National Economic Council. This provision was a compromise position reached to allay the fears of the Nigerian Governors Forum who felt the initial proposal to progressively reduce CIT for large companies to 25% by 2030 would likely reduce revenue inflows into the federation account since CIT revenue is shared by the three tiers of government.

The provision allows the eventual rate reduction to happen when the states (who are represented in the National Economic Council) are confident that such a reduction will not adversely impact on the federation revenue inflows. The Council will then advise the President to proclaim the order reducing CIT to 25%. If the new tax laws were to be anti-productivity, the company income tax rate would have been jerked up to above the 30% rate in the old Income Tax law.

CONCLUSION

From the foregoing, it is evidently clear that the income tax provisions in both the Nigeria Tax Act and the Nigeria Tax Administration Act are people-friendly, business-friendly, pro-poor and formulated to stimulate productivity by reducing the amount of money businesses pay as profit taxes or eliminating the profit tax entirely for small businesses. It is important that states through their tax authorities massively educate residents on the correct provisions of the tax laws especially as it pertains to income taxes.

As I conclude, I must emphasise that tax is an obligation that citizens owe their country. There is no valid excuse for any ELIGIBLE taxpayer, especially those who are not classified poor, to shy away from paying their fair share of taxes. This also applies to eligible corporate taxpayers. The new tax laws makes tax evasion more difficult and will bring many eligible taxpayers, hitherto avoiding taxes, into the tax net. As more high networth individuals and entities are captured in the tax net, they will have more motivation to demand for accountability from elected and appointed leaders across the three tiers of government who manage these tax revenues. This is potentially a very good news for accelerated national development.

•Chibuzo is Publisher of Podium Online Newspaper.

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