How is Personal Income Tax calculated in Nigeria?
In Nigeria, personal income tax is calculated based on a progressive taxation system, where higher income levels are taxed at higher rates. Below is an explanation of how personal income tax is structured in Nigeria, effective from January 1, 2023:
What is the Progressive Taxation System in Nigeria?
Nigeria uses a progressive taxation system for personal income tax, meaning that the tax rate increases as an individual's income increases. The tax rates are applied in tiers, with different portions of income being taxed at different rates.
Breakdown of Personal Income Tax Rates:
- First ₦300,000: The first ₦300,000 of yearly income is taxed at 7%.
- Next ₦300,000: The next ₦300,000 of income is taxed at 11%.
- Next ₦500,000: Income beyond the first ₦600,000 but within the next ₦500,000 is taxed at 15%.
- Next ₦500,000: The following ₦500,000 is taxed at 19%.
- Next ₦1,600,000: Income above ₦1,600,000 and up to ₦3,200,000 is taxed at 21%.
- Above ₦3,200,000: Any income exceeding ₦3,200,000 is taxed at the highest rate of 24%.
Example of Tax Calculation
For an individual earning ₦4,000,000 annually:
- The first ₦300,000 is taxed at 7%, resulting in ₦21,000 in tax.
- The next ₦300,000 is taxed at 11%, resulting in ₦33,000 in tax.
- The next ₦500,000 is taxed at 15%, resulting in ₦75,000 in tax.
- The next ₦500,000 is taxed at 19%, resulting in ₦95,000 in tax.
- The next ₦1,600,000 is taxed at 21%, resulting in ₦336,000 in tax.
- The remaining ₦800,000 (which is above ₦3,200,000) is taxed at 24%, resulting in ₦192,000 in tax.
Total Tax: ₦21,000 + ₦33,000 + ₦75,000 + ₦95,000 + ₦336,000 + ₦192,000 = ₦752,000.
Withholding Tax
In addition to the progressive income tax, withholding tax is a method used by employers to deduct tax directly from an employee's salary at the source, ensuring that the tax is paid regularly throughout the year.
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