What is Personal Income Tax (PIT)?

By Deloitte Nigeria | 5 min read
11th September 2017
What is Personal Income Tax (PIT)?

In Nigeria, individuals are required to pay tax on the income derived from a trade, business, profession, vocation or employment (self-employed and employees), partnerships, executors and trustees and communities and families. Examples of these trade, business, profession, and vocation are Tailoring, hairdressing, recruitment agents, plumbing, carpentry, cyber/ internet cafe operators, landlords, petty trading, car wash, bars and restaurants, catering etc.

The Personal Income Tax Act (PITA) provides guidelines for managing the taxes of individuals.

Taxing authority

The State Board of Internal Revenue (SBIR) located where the tax payer lives is responsible for managing his or her PIT. However, the Federal Inland Revenue Service (FIRS) is responsible for managing PIT for individuals living in the Federal Capital Territory (FCT), members of the armed forces and Nigeria police force; staff of the ministry of foreign affairs, and non-resident individuals.

Forms of PIT assessments for Micro Small and Medium Enterprises (MSME)

There are two types of scheme for the purpose of filing PIT in Nigeria. These are described below:

  • Direct assessment: Individuals who are not employed, but earn income either through trade, business profession, and vocation are taxed under the direct assessment scheme. Under this scheme, the individual is required to determine his/her PIT and remit it to the relevant tax authority (RTA) on an annual basis, in accordance with PITA - This will be SBIR/FIRS depending on where the tax payer lives. The individual is required to make the payment and filing by 31 March every year. For instance, filing for the tax year 1 January 2016 to 31 December 2016 should be filed by 31 March 2017.
  • PAYE: PIT for individuals in paid employment come under this scheme. Employers are responsible for deducting and remitting income tax from the employees' income and make payment to the designated bank account of the RTA on a monthly basis. The designated bank will issue the employer with a revenue receipt to serve as proof of payment by the employer.


    The owner of the MSME Business is required to file his tax return under direct assessment whilst the tax returns of the employees should be filed under PAYE tax system. Where the owner of the Business has structured his expenses such that he receives monthly payment, as his/her own salary, his monthly salary should be captured under PAYE tax scheme.

    Tax year

    In Nigeria, the tax year is 1 January to 31 December

    Tax rate

    PIT is calculated on a graduated scale and on actual year basis.

    Annual income band

    Rate

    Total tax on annual income bracket

    Monthly income band

    Rate

    Total tax on monthly income bracket

    First N300,000

    7%

    N21,000

     First 25,000.00

    7%

    N21,000

    Next N300,000

    11%

    N54,000

    Next  25,000.00

    11%

    N54,000

    Next N500,000

    15%

    N129,000

    Next  41,666.67

    15%

    N129,000

    Next N500,000

    19%

    N224,000

    Next 41,666.67

    19%

    N224,000

    Next N1,600,000

    21%

    N560,000

    Next 133,333.33

    21%

    N560,000

    Above N3,200,000

    24%

     

    Above 266,666.67

    24%

     

    The tax rate is applied on taxable income which is calculated as follow:

    PAYE system:

    Taxable Income = Total income - Consolidated relief allowance - other tax reliefs

    Direct assessment system: 

    Taxable Income = Total income - deductions allowed - Consolidated relief allowance - other tax reliefs 

    Where the annual taxable income is less than N300,000 or negative, the individual will be required to pay a minimum tax which is calculated as 1% of gross income. 

    Taxable income 

    Taxable income is the portion of the total income that gets taxed in line with the tax rate shown in the table above. 

    Total income 

    PITA explains total income as including all gain or profit from any trade, business, profession or vocation, rent received, salary, wage, fee, allowance, gain or profit from employment including bonus, etc. received inside or outside Nigeria. 

    Deductions allowed 

    The law provides for individuals to deduct expenses that are wholly, exclusively, necessarily and reasonably incurred by the individual to produce the total income. Below are some of the deductions allowed: 

    • Interest paid for money borrowed as part of the capital in the business
    • Interest on money borrow to develop or repair home occupied by the business owner
    • Rent paid for space, land and buildings where business was carried out to produce the income
    • Any expense incurred for repairs of premises, machines, plants or fixtures, tools used in producing the income 

    Exempt income 

    There are some incomes that are not taxable and these incomes are stated in the third schedule of PITA. Examples of incomes that are not taxed are monies paid to an individual as compensation for loss of employment, interest on domiciliary bank account, amongst others.

    Tax reliefs 

    There is a part of total income for every individual tax payer in Nigeria that does not get taxed. This portion of the income is termed consolidated relief allowance (CRA). The annual CRA is 20% of total income plus the higher of N200,000 or 1% of total income. 

    In addition to the CRA, some individuals also enjoy other reliefs for their contribution into some national saving schemes. Contributions by and individual into the National Pension

    Scheme, Gratuity fund, National Housing Fund, National Health Insurance Scheme and Life assurance premium provide additional tax reliefs to the individual. These tax reliefs can be claimed before arriving at the taxable income as stated above. 

    Tax registration

    The owners of MSMEs are required to register for PIT by making an application to the relevant SBIR. The application for PIT registration is expected to contain details about the business and its owners and should be accompanied by relevant business registration documents to confirm legal status of the business. The registrations will also indicate the number of employees.

     

    Due date for filing returns and penalty for non-compliance

    S/N

    PAYE

    Direct Assessment

    1

    Due date for filing

     

    Due date for filing

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Monthly Returns

    The monthly return is the payment of PAYE tax deducted from the employees.

     

    This is due by the 10th day of the month following the month  PAYE tax was deducted

     

    For example, PAYE tax for January is due by 10 February

     

    Monthly Returns

    No monthly filing obligation

     

     

     

     

     

    Annual Returns

    Employee's tax return (Form A)

    All employees are required to file annual returns (Form A) showing the employee's projected total income for the year by the 31st of March.

     

    Employer's tax return (Form H1)

    Business owners who have employees are required to file Form H1 which shows total income paid to each employee and the amount of tax deducted from each employee. The Form H1 should be submitted with copies of revenue receipts which are proofs that the taxes deducted from the employees were remitted to the RTA.

     

    The Form H1 should be filed by 31st January the immediate past tax year.

     

    Annual Returns

    Form A

    Individuals under the direct assessment are required to file annual returns (Form A) showing the employee's total income and tax paid in the year by the 31st March of the following year.

     

    For instance total income and tax paid in 2016 tax year is required to be reported in the Form A by 31 March 2017.

     

     

     

     

     

     

     

     

     

     

     

    2

    Due date for payment

     

    10th day of the month following the month of deducting PAYE.

    Due date for payment

     

    Before the filing deadline of 31st March.

    3

    Penalty

     

    • Non filing of Form A - N5,000 plus N100 for every day of non-compliance

     

    • Non filing of Form HI - N500,000 for corporate and N50,000 for individuals

     

    • Late payment of PAYE tax - 10% of tax amount not paid plus interest at Central Bank of Nigeria (CBN) base lending rate

    Penalty

     

    • Non-filing of Form A - Penalty for non-compliance is N5,000 plus N100 for every day of non-compliance

     

    • Late payment of PIT - Penalty for late remittance is 10% of tax due plus in
    Deloitte Nigeria
    Deloitte & Touche is the Deloitte Touche Tohmatsu Limited (DTTL) member firm in Nigeria and the oldest indigenous professional services firm in Nigeria. The firm was established in 1952 by Mr. Akintola Williams, FCA, CFR, CBE, the doyen of the accountancy profession in Nigeria. Through astute management, the member firm has grown in size and scope of services to become one of the largest global professional services organisations in Nigeria, with offices in Lagos, Abuja and Port Harcourt. The firm currently provides audit, tax, consulting, accounting and financial advisory, corporate finance, and risk advisory services, to public and private clients spanning multiple industries. www.deloitte.com.ng
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