Understanding the Proposed Tax Reforms with Regards to Personal Income Tax
Nigeria’s tax system has long been bedeviled by a number of challenges: multiple taxation, complex collection administrative framework and and poor collection system.
For example, the Personal Income Tax Act (PITA) governs individual taxation, with tax brackets that impose higher rates on increasing income levels. However, tax compliance has historically been low. This is partly driven by the fact that a significant portion of the workforce operate in the informal sector and many eligible taxpayers fail to remit their dues.
All these factors have combined to result to a relatively low tax-to-GDP ratio.
To address these challenges, the government embarked on a comprehensive reform of the tax system. Thus in October 2024, the government initiated an executive bill at the national assembly. The tax reform bill is intended to not only simplify tax processes and broaden the base but also to reduce tax burden, particularly on low income earners.
In furtherance to the tax reform bill currently undergoing consideration at the National Assembly, the Presidential Fiscal Policy and Tax Reforms Committee has introduced a new Personal Income Tax Calculator. This tool is designed to help taxpayers understand the changes as contained in the proposed Act and their financial implications.
According to Taiwo Oyedele, the chairman of the Presidential Fiscal Policy and Tax Reforms Committee, the introduction of the new Personal Income Tax Calculator is part of a broader strategy to enhance transparency and improve tax compliance. The calculator allows individuals to compare their tax liabilities under the current law and the proposed bill, highlighting key changes and their effects on take-home pay.
In this article, let’s use a hypothetical Nigerian worker earning the minimum wage to analyze how the proposed tax reform impacts disposable income. Disposable income is the portion of your earnings that is available for spending after the deduction of personal income tax.
Under the existing tax framework, salary earners enjoy some tax deductions such as 20% personal relief on gross income and N200,000 consolidated allowance to arrive at taxable income. Thus, a worker earning the minimum wage of N70,000 per month or N840,000 annually after providing for these deductions will have N472,000 as taxable income.
When assessed against existing tax brackets, this will result to an annual tax burden of N39,920 or a monthly deduction of N3,326.67.
However, under the proposed tax regime, there are notable adjustments. The new framework eliminates personal relief deductions but introduces rent relief of N200,000. More significantly, the first N800,000 of taxable income falls under a 0% tax rate, effectively exempting the entire income of minimum wage earners from taxation.
As a result, individuals earning N70,000 per month would pay zero tax under the proposed structure, translating to full retention of their monthly salaries. Recent data shows that just about 10% of Nigerian workers earn monthly income within the region of N100,000 and above. Thus, on passage or the tax reforms bill into law, majority of Nigerian workers would be exempt from tax, effectively.
As highlighted above, the most significant outcome of the tax reforms under the proposed tax law is that minimum wage or low income earners will no longer have to pay personal income tax.
This will lead to an increase in disposable income for the average Nigerian worker as they will now be able to retain their entire earnings, effectively increasing their spending power and financial stability. This is very significant when you consider current challenges facing the Nigerian economy; including rising inflation and a high cost of living.
Another major takeaway is that the tax reform aims to simplify the taxation system while ensuring that low-income earners benefit from tax exemptions. With the restructuring of the tax brackets, the system becomes more progressive, ensuring that those who earn more pay more tax while alleviating the burden on lower-income groups. This will address the challenge inequity which many have observed is present in the current system. The current system is regressive at best making it possible for high and ultra high income earners to pay less tax while low income group carry the burden.
In addition, the introduction of a digital tax calculator marks an important step in transparency and accessibility. With this tool, taxpayers can easily compute their expected tax liability under both the current and proposed tax laws. This level of awareness empowers individuals to plan their finances more effectively and understand their obligations within the broader tax framework.
For millions of Nigerians, particularly those earning at or slightly above the minimum wage, the proposed tax reform brings financial relief. With no deductions on their salaries, these workers will have more disposable income to cater to daily expenses, savings, and investments.
This shift could also help stimulate economic activities, as increased consumer spending can contribute to business growth and job creation.
Beyond immediate financial relief, the new tax regime signals a broader commitment by the government to reform Nigeria’s tax system in a way that enhances compliance while easing the tax burden on lower-income earners. The restructuring of tax brackets ensures a more progressive taxation system, where those earning significantly higher incomes will bear a greater share of the tax burden. This help to promote equity and fairness.
Furthermore, the changes will encourage better tax compliance among middle- and high-income earners. This, in the long run, will strengthen Nigeria’s fiscal position and improve public service delivery.
Ultimately, the proposed tax changes stand as a positive development for many Nigerians, particularly those in the low-income bracket.
By ensuring that minimum wage earners are exempt from taxation, the government has taken a step toward easing financial pressures on the most vulnerable while promoting a fairer tax system. With the tax calculator now available, individuals can explore how the proposed changes affect their specific income levels and plan accordingly for the future.
Buchi creates content and leads the Team at Kobotalk Management Services; a business development and investment consultancy firm. He provides strategic advisory to help SME's, small business owners and HNI's grow profitable business and make informed investing decisions.
Buchi creates content and leads the Team at Kobotalk Management Services; a business development and investment consultancy firm. He provides strategic advisory to help SME's, small business owners and HNI's grow profitable business and make informed investing decisions.