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Overview of Tax Liability Under the New Regime
The updated tax law broadens the scope of taxable individuals. You are liable to pay tax if you meet any of the following conditions:
- You reside within Nigeria;
- You are employed by a Nigerian company or organization;
- You work for the Nigerian government but are stationed abroad;
- You are a seafarer employed under Nigerian jurisdiction.
Whether you operate from a traditional office, work remotely overseas, or serve on a vessel, your Nigerian-sourced income falls under the tax umbrella.
Who Is Exempt from Tax Under the New Law?
Not all income earners will be affected. The law exempts certain groups and income types, including:
- Individuals earning below the national minimum wage threshold of ₦800,000 annually;
- Members of the armed forces, whose salaries remain fully tax-exempt;
- Payments such as death gratuities and redundancy compensations.
Consequently, low-income workers and military personnel will not experience any tax burden changes.
Expanded Definition of Taxable Income
The Tax Act 2025 broadens what constitutes taxable income. For employees, taxable earnings now include:
- Basic monthly salary;
- Allowances of all kinds;
- Performance bonuses;
- Benefits-in-kind (BIK), such as employer-provided housing and vehicles.
Conversely, certain job-related items remain non-taxable, including:
- Meal vouchers;
- Work uniforms;
- Tools necessary for job performance.
This means that employees receiving numerous perks may see a higher taxable income base.
Updated Tax Brackets for Salaried Workers
Employers will continue to withhold Pay-As-You-Earn (PAYE) taxes monthly, but the rates have been revised as follows:
- 0% on the first ₦800,000;
- 15% on the next ₦2.2 million;
- 18% on the subsequent ₦9 million;
- 21% on the following ₦13 million;
- 23% on the next ₦25 million;
- 25% on any income exceeding ₦50 million.
These progressive rates aim to ensure equity, though middle-income earners may notice increased tax deductions starting 2026.
Allowable Deductions to Minimize Taxable Income
Before tax is computed, taxpayers can deduct certain approved expenses, including:
- Contributions to pension schemes;
- Payments into the National Housing Fund (NHF);
- Health insurance premiums;
- Interest paid on housing loans;
- Life insurance premiums;
- Rent relief capped at 20% of income or ₦500,000, whichever is lower.
For those running side businesses, legitimate operational costs such as:
- Shop or office rent;
- Employee wages;
- Fuel and vehicle maintenance;
- Tools and equipment purchases;
- Internet and data expenses;
- Research and development costs;
can also be deducted.
However, personal expenditures, capital investments, fines, and unapproved pension contributions are excluded from deductions. Maintaining meticulous financial records is now essential.
Tax Implications for Individuals with Multiple Income Streams
The new legislation enforces stricter rules for those earning from both employment and business ventures. All income sources must be aggregated before tax calculation.
For example, if you have a full-time job and also run an online store or provide freelance consulting, your combined earnings will be taxed as a single income.
This measure is designed to prevent income splitting tactics aimed at reducing tax liabilities.
Taxation of Freelancers and Digital Creators
A notable innovation in the Tax Act 2025 is the introduction of presumptive taxation targeting individuals who:
- Lack comprehensive financial documentation;
- Receive irregular or unpredictable income;
- Operate micro or small-scale enterprises.
Tax authorities will estimate taxable income based on available data such as bank transactions, online sales records, and invoices. This approach aims to curb tax evasion among freelancers, influencers, artisans, and small business owners who often do not maintain formal accounts.
State Versus Federal Tax Administration
The reform clarifies that personal income tax collection is now the responsibility of state governments, while the federal government retains control over corporate taxes.
Your state tax authority will oversee compliance and enforcement. Importantly, the government has dispelled rumors about automatic debits from individual bank accounts, reassuring taxpayers about their financial security.
Understanding the Tax Calculation Process
Although payroll departments handle most tax computations, it is beneficial to understand the methodology:
- Sum all taxable income components, including salary, allowances, and bonuses;
- Deduct allowable expenses such as pension and insurance contributions;
- The resulting figure is your taxable income;
- Apply the relevant tax brackets to this amount;
- Divide the annual tax liability by 12 to determine monthly deductions.
For instance, an employee earning ₦400,000 monthly could expect approximately ₦47,600 deducted as tax each month under the new system.
Practical Effects on Salaried Workers
- Employers will continue automatic tax deductions from salaries;
- Non-cash benefits like housing and vehicles may now increase taxable income;
- Employees should scrutinize their payslips from January 2026 to verify correct deductions;
- Side business owners must maintain accurate financial records to optimize deductions;
- Freelancers lacking proper documentation risk having their income estimated for tax purposes.
A Lagos-based tax expert summarized: “This reform aims to harmonize tax administration, reduce ambiguity, and encourage Nigerians to maintain proper financial documentation.”
Key Takeaways for Taxpayers
The 2026 tax reforms will affect virtually all income earners in Nigeria. While salaried employees will primarily notice changes in monthly tax deductions, freelancers and those with mixed income sources must prioritize transparency and record-keeping.
As the new year approaches, it is advisable for workers to review their current payslips, understand their income components, and prepare for the updated tax framework effective January 1, 2026.
