There are several misconceptions regarding the statutory tax obligations of business owners and employees in Nigeria. Many business owners mistakenly believe that complying with tax laws at the corporate level absolves them of personal tax obligations. Similarly, some people erroneously think that Personal Income Tax (PIT) rates in Nigeria range from 40% to 50%, leading them to avoid discussions about taxes. Many others do not understand the difference between PIT and corporate taxes and which one applies to them.

Personal Income Tax – What You Need to Know

Income derived from various sources such as employment, business, assets, and investments is subject to tax under the PIT Act 2011 (as amended) in Nigeria. The applicable income tax rate depends on the income level and the corresponding tax bracket. Historically, PIT rates in Nigeria were significantly higher. For example, between 1977 and 1986, the PIT rate was 70% on annual incomes of ₦30,000 and above, and between 1986 and 1997, it was 55% on annual incomes of ₦40,000 and above. However, recent reforms have significantly reduced these rates.

When considering reliefs and allowances, such as consolidated relief allowance, pension contributions, interest on mortgages for owner-occupied houses, and life assurance premiums, the average effective PIT rate is around 18%.

Understanding the Difference Between Personal and Corporate Income Tax

It is crucial to understand the difference between personal income and company income and the applicable tax authority. If an individual owns a company, the company’s profits are subject to tax under the Companies Income Tax (CIT) Act. However, the income the individual receives from the company is taxable under the PIT Act. The payment of CIT by the company does not exempt the individual owner from paying PIT on the income derived from the company, except where such income is specifically exempt from PIT.

Consequences of Non-Compliance

The average Nigerian may be reluctant to pay taxes due to the perceived lack of direct benefits from such payments. Common questions include, “What has the government done with past tax payments?” While this concern is ethically valid, the PIT system, like other tax systems, is not based on moral suasion.

Every taxable person, whether a business owner or an employee, has a duty to comply with the PIT Act concerning monthly tax payments and the filing of annual tax returns, regardless of perceived benefits. Failure to comply with statutory tax requirements can result in penalties and interest payments in addition to the principal amount owed. In some cases, defaulters may face criminal prosecution and potential jail terms.

Non-compliance can also negatively impact business operations. The inability to obtain a Tax Clearance Certificate, now a major requirement for conducting business locally and internationally, can be detrimental. The reputational damage and other negative effects of being on the wrong side of tax laws far outweigh the benefits of unremitted taxes.

Conclusion
It all comes down to a cost-benefit analysis. Individuals need to weigh the costs and benefits of complying with tax laws against the potential additional tax exposures that may eventually arise from non-compliance. A review of one’s tax position through tax health checks and subsequent regularization with relevant tax authorities may be the best way to avoid being caught on the wrong side of the law. Seeking professional help to ensure proper tax compliance can provide peace of mind and prevent future surprises when the taxman comes calling.

For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, Online accounting support, Company Registration, and CAC matters, please contact Inner Konsult Ltd. Visit us at www.innerkonsult.com or reach out via WhatsApp at +2348038460036. You can also find us at our offices in Lagos or Ogun State, Nigeria.