Understanding the Nigeria Tax Act, 2025: What Individuals and Businesses Need to Know.
By Ikechukwu James Orji Esq.
Introduction
The Nigeria Tax Act, 2025 marks a significant turning point in Nigeria’s tax system. For the first time, multiple tax laws have been consolidated into a single, unified legal framework. The Act is designed to simplify taxation, improve compliance, expand the tax base, and align Nigeria’s tax system with global standards.
This article explains the key provisions of the Nigeria Tax Act, 2025, addresses common misconceptions, and provides practical guidance on how individuals and businesses can organize their affairs in compliance with the new law.
Clearing the Common Misconceptions About the Nigeria Tax Act
1. Not All Money Received Is Taxable
One of the most widespread misconceptions is that the Act imposes tax on every payment received by an individual or company. This is incorrect. Tax is imposed primarily on income, profits, and gains.
Payments that do not confer a benefit on the recipient, such as reimbursements for expenses incurred in the course of work or funds received solely to execute an assigned task, are not taxable. In such cases, the recipient is merely a conduit and not the beneficiary of the funds.
2. Tax Is Not Paid on Every Transaction
Another misunderstanding is that tax must be paid immediately upon receiving money. With the exception of Value Added Tax (VAT) and withholding tax, income tax is assessed periodically:
- Companies are taxed on a yearly
- Individuals under the PAYE system are taxed monthly.
3. Not Everyone Is Liable to Pay Tax
The Act provides clear exemptions for certain individuals and companies:
- Individuals earning ₦800,000 or less per annum or the national minimum wage are exempt.
- Companies with gross turnover of ₦50,000,000 or less per annum may qualify as small companies and enjoy tax exemption.
However, these exemptions are not automatic. To benefit, individuals and companies must still file tax returns to allow the tax authority confirm eligibility.
- Description for Transfer Made
There is a widespread misconception on social media that merely imputing a description when transferring money is sufficient to exempt a taxpayer from paying tax on such funds. This belief is incorrect.
The description attached to a transfer has no bearing on whether a sum is subject to tax, particularly where the account involved is a private savings account. This is due to the limited tax exemptions available to individuals. These exemptions are discussed below. Simply adding a description to a transfer does not, on its own, qualify a transaction for tax exemption.
However, descriptions may be relevant where transfers are made from corporate accounts. In such cases, their primary purpose is for transaction tracking and record-keeping. Even then, a description alone does not entitle a taxpayer to an exemption. Taxpayers are required to provide adequate documentary evidence to support any exemption claims made.
How Tax Is Imposed Under the Act
Income tax under the Nigeria Tax Act, 2025 is imposed on:
- Profits or gains of companies and enterprises;
- Income of individuals or families; and
- Income accruing to trustees or estates.
Importantly, tax liability is tied to income, profits, or gains, not mere cash inflows.
What Constitutes Taxable Income?
Taxable income includes earnings from:
- Employment (salaries, wages, allowances, bonuses);
- Business or professional activities;
- Investments and dividends;
- Disposal of assets, whether physical, digital, or virtual;
- Fees, benefits, compensations, and perquisites;
- Pensions, annuities, and similar income.
Not every bank credit is taxable; the key question is whether the amount represents income earned or gain realized.
Tax Residence and Its Implications
Resident Individuals
Residence, not citizenship, is the basis for taxation. An individual resident in Nigeria is taxable on worldwide income, regardless of where it is earned or whether it is brought into Nigeria.
This means that a Nigerian resident working for a foreign company or earning income abroad may still be subject to tax in Nigeria.
Non-Resident Persons and Businesses
Non-resident individuals and companies can also be taxed in Nigeria where income is:
- Derived from business activities carried on in Nigeria;
- Attributable to a permanent establishment or significant economic presence in Nigeria;
- Connected to assets located or deemed to be located in Nigeria; or
- Paid by a Nigerian resident for services rendered outside Nigeria.
Employment Income Under the Act
Employment income is deemed to be derived from Nigeria where:
- The employee is resident in Nigeria; or
- Employment duties are wholly or partly performed in Nigeria and the remuneration is paid by a Nigerian employer, borne by a Nigerian permanent establishment, or not taxed in the employee’s country of residence.
Presumptive Taxation: When Records Are Inadequate
Where a taxpayer fails to keep proper records or where income cannot be accurately determined, the Act allows the tax authority to assess tax liability under a presumptive tax regime. This highlights the importance of maintaining proper accounting records.
Allowable Deductions for Individuals
Before tax is calculated, individuals are entitled to deduct certain expenses, including:
- Pension contributions;
- National Housing Fund contributions;
- National Health Insurance Scheme contributions;
- Interest on loans for owner-occupied residential property;
- Life insurance premiums and annuities;
- Rent relief of 20% of annual rent, capped at ₦500,000.
These deductions must be claimed in writing and supported with documentary evidence.
Transactions That Are Not Subject to Tax
The Act exempts certain transactions from tax, including:
- Gifts made without consideration;
- Disposal of a primary residence;
- Low-value personal chattels;
- Motor vehicles used solely for private purposes;
- Assets held by churches, charities, and other non-profit organizations, provided gains are not derived from commercial activities.
Individual Income Tax Rates
After reliefs and deductions, taxable income is charged as follows:
First ₦800,000 – 0%
Next ₦2,200,000 – 15%
Next ₦9,000,000 – 18%
Next ₦13,000,000 – 21%
Next ₦25,000,000 – 23%
Above ₦50,000,000 – 25%
Individuals earning ₦800,000 or less annually are fully exempt from income tax.
Taxation of Companies
Corporate Tax Rates
- Small companies: 0%
- Other companies: 30%
A small company is one with gross turnover of ₦50,000,000 or less per annum and total fixed assets not exceeding ₦250,000,000, excluding professional service firms.
Allowable Deductions for Companies
Companies may deduct expenses wholly and exclusively incurred in generating income, including:
- Interest on business loans;
- Rent for business premises;
- Salaries and employee benefits;
- Repairs and maintenance;
- Pension and retirement contributions;
- Bad and doubtful debts;
- Research and development expenses;
- Approved pre-commencement expenses;
- Certain regulated investment and lending expenses;
- Disability-related assistive devices.
Value Added Tax (VAT)
It is important to note that under the new Act, VAT does not apply to all goods and services. Additionally, not all companies or individuals are permitted to charge VAT. Charging VAT without legal authority constitutes an offence.
Who Can Charge VAT?
Under the new tax Act, only companies with an annual turnover exceeding ₦100,000,000 (One Hundred Million Naira), and assets exceeding ₦250,000,000 (Two Hundred and Fifty Million Naira), are required to charge VAT. This requirement excludes professional firms.
Nevertheless, the Act provides an option for companies that do not meet these thresholds to voluntarily apply for permission to charge VAT.
As previously stated, not all goods or transactions are subject to VAT. Some attract a zero-rate, while others are completely exempt. Examples include basic food items, rent, education services and materials, health and medical services, baby products, and similar essentials.
Conclusion
The Nigeria Tax Act, 2025 introduces a more streamlined and transparent tax regime, balancing expanded tax coverage with meaningful exemptions and deductions. While compliance is now more structured, the Act also provides opportunities for individuals and businesses to lawfully manage their tax obligations.
Proper record-keeping, timely filing of returns, and professional guidance remain essential. With the right approach, taxpayers can remain compliant while taking full advantage of the reliefs provided under the Act.
Recommendation
In light of the new tax law, it is recommended that companies maintain proper and accurate records of all transactions and engage the services of qualified professionals to track expenditures and manage the company’s financial and legal affairs. Proper documentation and professional oversight are essential for compliance and effective tax administration.
Additionally, individuals who operate businesses are advised to formally incorporate their businesses and open separate corporate bank accounts. Doing so allows them to enjoy the benefits and protections provided under the law, as tax and regulatory frameworks are generally structured to better accommodate and protect businesses and their owners when proper corporate structures are in place.
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