The Federal Government’s proposed tax reform bills aim to simplify Nigeria’s personal income tax system and address long-standing inefficiencies, including “fiscal drag” and inequitable tax burdens. Taiwo Oyedele, an authority on tax reforms, sheds light on the thinking behind these changes and their implications for workers across different income brackets.
Tackling Inequities in the Current Tax Regime
According to Oyedele, the current personal income tax table, introduced in 2011, has become outdated due to high inflation and a lack of periodic reviews. As a result, many low-income earners have been pushed into the top tax bracket, creating a regressive tax system. “An individual earning just ₦400,000 a month pays the same top marginal income tax rate as someone earning ₦20 million per month,” Oyedele explains.
Additionally, the present system discourages formalization, as the effective top tax rate for companies is nearly double that for enterprises, leading to tax arbitrage. The proposed changes seek to address these issues by simplifying the tax system, incorporating existing reliefs and allowances into the tax bands, and reducing the effective tax rate for most workers.
Myth: Workers Will Pay More Taxes
Contrary to public perception, the reforms are designed to ease the tax burden on the majority of Nigerians. Oyedele clarified that individuals earning ₦1.7 million or less per month would pay lower Pay-As-You-Earn (PAYE) tax under the new system. Workers earning the minimum wage of ₦70,000 and slightly above will be fully exempt from taxation.
“These changes will result in over 90% of workers in the public and private sectors paying lower taxes, while high-income earners will pay slightly more in a progressive manner,” Oyedele adds. Ultra-high-net-worth individuals will face a top tax rate of up to 25%.
Addressing Tax-Free Thresholds
One notable feature of the reform is the tax exemption threshold. While ₦800,000 per annum (₦67,000 per month) is exempt from tax, additional rent relief of up to ₦200,000 per annum means that individuals earning up to ₦1 million annually (₦83,000 per month) will not pay any taxes. This provision aims to alleviate the financial burden on low-income earners.
Moreover, the reforms address potential inequities in tax treatment at the margins. For instance, under the existing system, someone earning just ₦1 more than the exemption threshold might end up worse off after taxes. The new tax table eliminates this anomaly by ensuring that all taxpayers benefit from the first tax-free bracket.
Simplifying Tax Calculations
Another critical objective of the reform is to simplify tax calculations. The tax bills incorporate existing reliefs, such as the Consolidated Relief Allowance (CRA), directly into the tax brackets and rates. This approach not only reduces the tax burden on middle-income earners but also makes it easier for individuals to compute their taxes without external assistance.
Statutory Deductions Remain Intact
Statutory deductions, now referred to as “eligible deductions,” remain applicable under the new tax regime. These include contributions to the National Housing Fund, National Health Insurance Scheme, and pensions, as well as deductions for life insurance premiums, interest on home loans, and rent relief of up to ₦200,000 per annum.
Where to Learn More
For detailed information about the tax reform bills, visit fiscalreforms.ng or follow their social media accounts. Copies of the bills and other explanatory materials are available for public access.
This reform marks a significant step towards achieving a fairer and more efficient tax system, ensuring that low and middle-income earners benefit from reduced tax burdens while high-income earners contribute progressively.
