Demystifying Nigeria’s New Tax Regime: How Low-Income Earners Will Pay Zero Tax

Since January 1st, Nigeria’s new tax regime has been in effect, and with it, a promise that many low-income earners will pay absolutely no tax. This bold claim has sparked discussions, but the Federal Government has now stepped forward to clarify exactly how this is possible, dispelling what it calls ‘wrong notions’ and ‘stage-managed arithmetic’ circulating in the public.

Tanimu Yakubu, Director-General of the Budget Office of the Federation, recently provided a detailed explanation, stressing that critics have conveniently omitted the most crucial element of the new structure: the N800,000 annual tax-free threshold.

The Hinge: Your First N800,000 is Tax-Free!

Under the updated Personal Income Tax (PIT) framework, the first N800,000 of your annual income is taxed at a flat 0%. This is a significant departure from previous systems that often grouped low-income earners into broader tax brackets without such a generous initial exemption. Yakubu firmly stated, "That is not a footnote. That is the hinge."

Let’s Do the Math: Meet ‘Joseph’

To illustrate, Yakubu used a simple example:

• Joseph’s Monthly Income: N75,000
• Joseph’s Annual Income: N900,000 (N75,000 x 12)

Without the N800,000 threshold, one might assume Joseph is fully taxable. However, applying the new rule changes everything:

1. Above the Zero-Rated Band: Only N100,000 of Joseph’s income (N900,000 – N800,000) is potentially exposed to tax.
2. Initial PIT Exposure: If this N100,000 falls into a 15% tax band, Joseph’s gross annual PIT would be N15,000 (N100,000 x 15%), translating to N1,250 per month.

The Power of Deductions: Pension and Health Insurance

But the story doesn’t end there. Crucial deductions further reduce this taxable income:

• Pension Contributions: If Joseph contributes 8% to his pension, that’s N72,000 annually (N900,000 x 8%). This reduces the taxable portion above N800,000 from N100,000 to just N28,000. Now, Joseph’s annual tax exposure drops to N4,200 (N28,000 x 15%), or N350 per month!
• Health Insurance: Even better, if Joseph has any deductible health insurance contributions (common in many formal arrangements), his taxable income can easily fall below the N800,000 mark entirely, making his Personal Income Tax ZERO!

Deductions Are Not Taxes!

A key point of contention addressed by the DG is the misunderstanding of deductions. Yakubu emphasized that pension contributions are deferred wages owned by workers in their Retirement Savings Accounts (RSAs), and health insurance premiums purchase defined coverage. These are not ‘taxes’ or ‘levies you lose,’ but rather mechanisms that protect workers’ welfare and, critically, reduce their taxable income.

Setting the Record Straight on Other Criticisms

Yakubu also tackled other widespread misrepresentations:

• Misuse of Global Poverty Lines: Critics often misapply the World Bank’s $4.20-a-day benchmark, which is a purchasing power parity (PPP) measure, not a nominal wage directly convertible to naira for tax purposes.
• "Widening the Tax Base" Doesn’t Mean Taxing the Poor: This phrase has been misinterpreted. Expanding the tax base primarily targets non-compliant high earners, closes loopholes, captures affluent segments of the digital and informal economy, and strengthens employer withholding, not subsistence incomes.
• Corruption Allegations vs. Tax Structure: While legitimate governance concerns exist, alleged corruption does not invalidate the structure of a tax schedule. The logical response to accountability issues is improved transparency and enforcement, not misrepresenting tax reforms designed to reduce Nigeria’s reliance on borrowing.

The DG concluded by stating that the outrage and criticism largely hinge on "omitting the very thresholds and concepts that make its conclusion collapse." He reiterated that Nigeria’s revenue problem stems from a historically weak tax-to-GDP ratio and heavy reliance on borrowing, and these reforms are explicitly designed to reverse that trend while protecting its most vulnerable citizens.

Ultimately, the new tax structure is framed to explicitly protect low-income earners, ensuring that many will indeed pay zero tax, despite narratives to the contrary driven more by emotional framing than factual analysis of the law.

Source: Original Article