Proposed income tax bill; Here is how much tax you might pay from your salary

The Presidential Committee on Fiscal Policy and Tax Reform (FPTR) has submitted a proposed new Personal Income Tax Bill aimed at restructuring the country’s tax system, with a particular focus on high-income earners.

The bill seeks to eliminate the Consolidated Relief Allowance (CRA) and introduce a 25% tax rate for individuals whose annual earnings exceed N50 million.

It also outlines allowable deductions under Section 28, which enable taxpayers to reduce their taxable income.

Key sections of the bill 

• Section 28: Defines eligible deductions that reduce taxable income.
• Section 30: Clarifies chargeable income and the conditions for deductions.
• Section 56: Outlines company tax rates, including those for sole proprietorships and individual businesses.
• Section 58: Refers to the Fourth Schedule, which specifies individual income tax rates.

Old tax calculation 

Under the previous system, salary earners were allowed to deduct certain allowances before calculating their personal income tax. The first of these was the Consolidated Relief Allowance (CRA).

• The CRA allowed you to deduct 20% of your gross income plus N200,000.
• For example, if your annual take-home pay was N6 million, you could deduct 20% of that amount (N1.2 million) plus N200,000, totalling N1.4 million.
• This means your taxable income would be reduced to N4.6 million.
• In addition, the current tax system also allows you to deduct statutory contributions such as pension contributions, National Housing Fund contributions, and life insurance premiums.
• These deductions can vary from one person to another, depending on the amount of statutory contributions made.
• The more contributions you make, the lower your taxable income. However, for simplicity’s sake, we will limit the discussion to the CRA deduction.

Based on the current Pay-As-You-Earn (PAYE) system, someone earning N6 million annually would pay about N896,000 in taxes.

The current system uses a graduated tax scale 

• 7% on the first N300,000
• 11% on the next N300,000
• 15% on the next N500,000
• 19% on the next N500,000
• 21% on the next N1.6 million
• 24% on the next N3.2 million

Proposed taxes 

Under the proposed tax system, the committee aims to simplify the process by eliminating the N200,000 plus 20% CRA formula.

However, the statutory allowances from the current system are retained, with an additional rent allowance of N200,000 or 20% of your rent (whichever is lower).

For simplicity, we’ll ignore the statutory and rent allowances in this calculation.

Using the same gross annual salary of N6 million, the tax payable under the proposed system would be N870,000, slightly lower than under the current system. The key difference is in how the graduated scale is applied:

• 0% on the first N800,000
• 15% on the next N2.2 million
• 18% on the next N9 million
• 21% on the next N13 million
• 23% on the next N25 million
• 25% on the next N50 million

For someone earning N6 million annually, the first N800,000 would be tax-free, leaving N5.2 million to be taxed. The next N2.2 million would be taxed at 15%, leaving N3 million, which would be taxed at 18%.

The calculation would look like this: 

Who pays more? 

Our analysis shows that the proposed tax system would result in lower taxes for Nigerians who earn less than N1,450,000 monthly (assuming statutory allowances are not deducted). However, those earning above this amount are likely to pay more.

• For Nigerians earning N70,000 monthly, which is the national minimum wage, the monthly tax would drop to N500 compared to N3,326 under the current system.
• Those earning below the minimum wage would not pay any taxes. For individuals earning N250,000 monthly, the new tax system would result in a monthly tax payment of N27,500, slightly lower than the N29,100 payable under the current system.

See the table below for likely taxes for different salary ranges.

Higher taxes for the super-rich 

• The chairman of the FPTR committee, Taiwo Oyedele, also highlighted the impact of the proposed tax rates on high-income earners. Nigerians earning more than N50 million annually (or roughly N4.4 million monthly) will face significantly higher taxes. 
• Our analysis reveals that those earning above N3 million monthly will pay an effective tax rate exceeding 20%. The effective tax rate is calculated as the total taxes paid divided by gross salary. 
• In contrast, under the current system, no individual pays more than 20% in effective taxes. 

Check the table below for several salary brackets and their associated taxes.