What is Personal Income Tax?
Personal income tax (hereinafter referred to as PIT) is a direct tax that is levied on the income of a person. ”A person” in this sense refers to ‘an individual, a sole proprietorship (non-juristic person), communities and families and on executors and trustees (of an undivided estate). Simply put, Personal Income Tax is the tax that accrues on the income of all those persons earning within Nigeria. The next question that comes to mind is the categories of income that Personal Income Tax accrues on and those that are exempted. PIT is guided by the Personal Income Tax Act Cap P8 LFN 2004 (as amended).
Categories of Income that Personal Income Tax can be levied upon
All earnings (salary, allowance, and wages) of an employee (self-employed inclusive i.e. a person that is running his business) for an employment which service is carried out in Nigeria, wholly or partly is due for Personal Income Tax. This means that all income that a person makes in the performance of a duty wholly or partly performed in Nigeria is taxable except:
Ø If the employer is not based in Nigeria and the remuneration is also not drawn from a fixed base of the employer in Nigeria. This category of income is not taxable under the act.
Ø If the employee is not in Nigeria for a period of 183 days within a calendar year.
Ø If the employee’s income is taxable in the other country where he/she resides.
Although, it has been established that the income of a person who works outside Nigeria is not taxable under PITA. However, if the said remuneration is obtained under the employment of a Government in Nigeria, it will be taxable under the PITA so far as the country of residence has a subsisting agreement with Nigeria to exempt such persons.
Furthermore, it should be noted that retirement gratuities, compensation for loss of office, and reimbursements for expenses incurred during the course of work are all not taxable under the Act.
Who Regulates the PIT?
Under the PITA, the place of residence is the primary factor in determining the body that is responsible for the collection and administration of the tax. A person’s place of residence within the context of the PITA is a place where a person uses such place for domestic purposes. Therefore, this excludes temporal places of residence such as an hotel.
The relevant tax authority is the tax authority of the place of residence. This means that if a person resides in Nasarawa State, the relevant tax authority is the Nasarawa State Internal Revenue Service, notwithstanding whether the person works in Abuja, outside the state.
However, the PIT of the staff of the Ministry of Foreign Affairs, other Nigerians and foreigners outside the country but earning income in Nigeria (non-residents), Police Officers, and Military Officers are paid to the Federal Inland Revenue Service.
- Pay-As-You-Earn (PAYE):This involves the employer deducting the PIT of the employees from their salaries before paying and remitting the tax to the relevant tax body.
- Direct Assessment: This on the other hand applies to individuals that are self-employed. The individual is expected to file a return of the income earned before the relevant tax body and pay the tax due upon calculation to the relevant body. The return must be filed on or before the 31st day of a new year for income all income earned the preceding year.
How is Personal Income Tax Calculated?
The first step is to ascertain your Gross Income. Gross annual income is the total sum of your salary, wages, allowance, bonus, business income, interests, dividends and all other income that doesn’t fall within those exempted as mentioned earlier.After ascertaining your Gross Income, the next step is to calculate your Taxable Income. The law of taxation does not seek to inconvenience the taxpayers, and as such, some of your income and expenses are exempted from taxation.
Thus, Taxable income is what is left of your Gross Income after subtracting expenses and deductions. Some of the tax reliefs include: Contribution to the National Pension Fund (NPF, at least 8% of income); Contribution to the National Health Insurance Scheme (NHIS, 5%); Contribution to the National Housing Fund (NHF, 2,5%) and Consolidated relief allowance (1% of Gross income or ₦200,000 whichever is higher + 20% of earned income). The possible reliefs (visit the relevant tax body to ascertain the full relief) will be subtracted from the Gross income to get the Taxable Income.
The next step is to calculate the PIT. The tax rate differs depending on your Taxable Income.
|Taxable Income||PIT Rate|
|Less than ₦300,000||1%|
For example, Mr. Ajagbe’s Gross Income at the end of the year is ₦5,000,000. The first step is to calculate the Taxable Income (Gross Income – expenses and deductions). The consolidated relief allowance here is N1,200,000. Assuming your possible reliefs are Pension Fund (7.5%), NPF (8%) and the NHF (2,5%), which is equal to ₦900,000.
Thus, Taxable Income = ₦5,000,000 – (₦1,200,000 + ₦900,000) = ₦2,900,000
|Taxable Income||PIT Rate||Tax Payable|
Hence, the PIT of Mr. Ajagbe is ₦497,000.
The Net Income after Tax is (₦5,000,000 – ₦497,000) = ₦4,503,000. Net Income is the total amount of money that Mr. Ajagbe takes home after the deduction of his PIT.
Please Note: The Tax Relief for Mr. Ajagbe was based on hypothesis to illustrate how PIT is mathematically ascertained.
Penalty for Defaulters
Any individual who fails to file the return of his income and pay his tax for the preceding year after the 31st day of March shall be liable upon conviction to a fine of N5,000 and an additional sum of N100 daily for as long as the failure continues or imprisonment of six months or both.
An employer on the other hand who fails to file a return shall be liable after conviction to a sum of N500,000 for corporate bodies and N50,000 for individuals.
ARTICLE WRITTEN BY:
Abdulmajeed Adeniyi Moshood is a Final Year Law Student at the University of Ilorin and has keen interest in all areas of law that has to do with the protection of the interest of the common man. He is also an avid legal researcher that writes on various aspects of law. He can be contacted through mail email@example.com and phone number 09030528182.
NB: THIS PUBLICATION IS ONLY AN INFORMATIVE PIECE FROM THE EDITORIAL BOARD, THE TAX CLUB, UNIVERSITY OF ILORIN. FOR PROFESSIONAL ADVICE, REACH OUT TO EXPERTS.