Employer Tax Responsibilities in Nigeria

Registration and Compliance

Tax Identification Number (TIN)

• Employers must obtain a TIN from the Federal Inland Revenue Service (FIRS)
• Required for all tax-related transactions and filings

Company Income Tax (CIT) Registration

• Register with FIRS for CIT within six months of company incorporation
• File annual CIT returns within six months after the accounting year-end

Pay-As-You-Earn (PAYE) Tax

Deduction and Remittance

• Deduct PAYE tax from employees' salaries monthly
• Remit deducted taxes to the relevant tax authority by the 10th day of the following month

Filing Requirements

• Submit annual PAYE returns by January 31st of the following year
• Provide employees with tax deduction cards annually

Social Security Contributions

National Housing Fund (NHF)

• Deduct 2.5% of basic salary from employees
• Remit to the Federal Mortgage Bank of Nigeria monthly

Pension Contributions

• Employer contributes minimum 10% of employee's monthly emoluments
• Employee contributes minimum 8% of monthly emoluments
• Remit to employee's Pension Fund Administrator within 7 days of salary payment

Industrial Training Fund (ITF)

• Contribute 1% of total annual payroll to ITF
• Applicable to employers with 5 or more employees or annual turnover of ₦50 million and above
• Payment due by April 1st of the following year

National Health Insurance Scheme (NHIS)

• Register eligible employees with NHIS
• Deduct and remit 5% of employee's basic salary
• Employer contributes 10% of employee's basic salary

Development Levy

• Pay annual development levy for each employee
• Amount varies by state, typically ₦500 per employee annually

Value Added Tax (VAT)

• Register for VAT if annual turnover exceeds ₦25 million
• Collect VAT on taxable goods and services at 7.5%
• Remit VAT monthly to FIRS by the 21st day of the following month

Withholding Tax (WHT)

• Deduct WHT from payments to vendors and contractors
• Rates vary depending on the nature of the transaction (typically 5-10%)
• Remit WHT to FIRS monthly for corporate entities, and to State Internal Revenue Service for individuals

Record Keeping

• Maintain accurate payroll records for at least six years
• Keep documentation of all tax payments and filings
• Ensure proper documentation of employee information and tax status

Compliance and Penalties

• Adhere to all filing deadlines to avoid penalties
• Late filing or non-compliance may result in fines, interest charges, and legal action
• Stay informed about changes in tax laws and regulations

Employee Tax Deductions in Nigeria

Personal Income Tax

Personal Income Tax (PIT) is the primary tax deduction for employees in Nigeria. It is calculated based on a progressive tax system, with rates ranging from 7% to 24% of taxable income.

Tax Bands and Rates

• First ₦300,000: 7%
• Next ₦300,000: 11%
• Next ₦500,000: 15%
• Next ₦500,000: 19%
• Next ₦1,600,000: 21%
• Over ₦3,200,000: 24%

Pension Contributions

Employees in Nigeria are required to contribute to the Contributory Pension Scheme. The standard contribution rate is 8% of the employee's monthly emoluments.

National Housing Fund (NHF)

Employees contribute 2.5% of their basic salary to the National Housing Fund, which aims to provide affordable housing for Nigerian workers.

National Health Insurance Scheme (NHIS)

Employees contribute 5% of their basic salary to the NHIS, while employers contribute 10%. This scheme provides healthcare coverage for employees and their dependents.

Industrial Training Fund (ITF)

Although primarily an employer contribution, some organizations may deduct 1% of an employee's basic salary for the ITF, which supports vocational and technical training programs.

Life Insurance

Employers are required to maintain life insurance policies for their employees, with a minimum coverage of three times the annual total emolument of the employee.

Tax Relief and Allowances

Several tax reliefs and allowances can reduce an employee's taxable income:

• Consolidated Relief Allowance: The higher of ₦200,000 or 1% of gross income plus 20% of gross income
• Child Allowance: ₦2,500 per child (maximum of four children)
• Dependent Relative Allowance: ₦2,000 per dependent (maximum of two dependents)

Pay-As-You-Earn (PAYE) System

Employers in Nigeria are responsible for deducting and remitting taxes on behalf of their employees through the PAYE system. This ensures that tax payments are spread throughout the year and reduces the burden on employees to make lump-sum payments.

Employee Tax Deductions in Nigeria

Personal Income Tax

Personal Income Tax (PIT) is the primary tax deduction for employees in Nigeria. It is calculated based on a progressive tax system, with rates ranging from 7% to 24% of taxable income.

Tax Bands and Rates

• First ₦300,000: 7%
• Next ₦300,000: 11%
• Next ₦500,000: 15%
• Next ₦500,000: 19%
• Next ₦1,600,000: 21%
• Over ₦3,200,000: 24%

Pension Contributions

Employees in Nigeria are required to contribute to the Contributory Pension Scheme. The standard contribution rate is 8% of the employee's monthly emoluments.

National Housing Fund (NHF)

Employees contribute 2.5% of their basic salary to the National Housing Fund, which aims to provide affordable housing for Nigerian workers.

National Health Insurance Scheme (NHIS)

Employees contribute 5% of their basic salary to the NHIS, while employers contribute 10%. This scheme provides healthcare coverage for employees and their dependents.

Industrial Training Fund (ITF)

Although primarily an employer contribution, some organizations may deduct 1% of an employee's basic salary for the ITF, which supports vocational and technical training programs.

Life Insurance

Employers are required to maintain life insurance policies for their employees, with a minimum coverage of three times the annual total emolument of the employee.

Tax Relief and Allowances

Several tax reliefs and allowances can reduce an employee's taxable income:

• Consolidated Relief Allowance: The higher of ₦200,000 or 1% of gross income plus 20% of gross income
• Child Allowance: ₦2,500 per child (maximum of four children)
• Dependent Relative Allowance: ₦2,000 per dependent (maximum of two dependents)

Pay-As-You-Earn (PAYE) System

Employers in Nigeria are responsible for deducting and remitting taxes on behalf of their employees through the PAYE system. This ensures that tax payments are spread throughout the year and reduces the burden on employees to make lump-sum payments.

Value-Added Tax (VAT) Implications for Services in Nigeria

Overview of VAT in Nigeria

Value-Added Tax (VAT) in Nigeria is a consumption tax levied on the supply of goods and services. The current standard VAT rate in Nigeria is 7.5%, which was increased from 5% in February 2020 as part of the Finance Act 2019.

VAT Registration Requirements

Mandatory Registration

All businesses operating in Nigeria, including those providing services, are required to register for VAT if they:

• Have an annual turnover exceeding NGN 25 million
• Provide taxable goods and services, regardless of turnover

Voluntary Registration

Businesses with turnover below NGN 25 million may voluntarily register for VAT if they wish to claim input VAT credits.

VAT on Services

Taxable Services

Most services provided in Nigeria are subject to VAT. These include:

• Professional services
• Consulting services
• Technical services
• Management services
• Rental services

Exempt Services

Certain services are exempt from VAT, including:

• Medical services
• Basic education services
• Exported services

VAT Compliance for Service Providers

Invoicing

Service providers must issue VAT invoices for their taxable supplies, clearly stating:

• The VAT amount
• The provider's VAT registration number

Filing and Remittance

VAT-registered businesses must:

• File monthly VAT returns by the 21st day of the following month
• Remit the VAT collected to the Federal Inland Revenue Service (FIRS)

Input VAT Recovery

Service providers can recover input VAT incurred on purchases related to their taxable supplies. This is done by offsetting input VAT against output VAT when filing monthly returns.

Reverse Charge Mechanism

When Nigerian businesses receive services from non-resident providers, they are required to self-assess VAT using the reverse charge mechanism. This involves:

1. Calculating VAT on the invoice amount
2. Remitting the VAT to FIRS
3. Claiming the same amount as input VAT (if eligible)

Penalties for Non-Compliance

Failure to comply with VAT regulations can result in penalties, including:

• Late registration: NGN 50,000 for the first month and NGN 25,000 for each subsequent month
• Late filing: NGN 50,000 for the first month and NGN 25,000 for each subsequent month
• Late payment: 10% of the tax due plus interest at the prevailing CBN minimum rediscount rate

Recent Developments

The Finance Act 2020 introduced changes to VAT administration, including:

• Clarification on the definition of "goods" and "services"
• Introduction of VAT on digital services provided by non-resident companies
• Expansion of the list of VAT-exempt items

Service providers in Nigeria must stay informed about these changes to ensure compliance with VAT regulations and optimize their tax positions.

Tax Incentives for Businesses in Nigeria

Nigeria offers various tax incentives to encourage investment and stimulate economic growth. These incentives are designed to attract both local and foreign businesses across different sectors. Here's an overview of the key tax incentives available to businesses operating in Nigeria:

Pioneer Status Incentive

The Pioneer Status Incentive (PSI) is one of the most significant tax incentives offered by the Nigerian government. It provides tax holidays to qualifying companies in industries deemed pioneering or vital to the country's economic development.

Key Features:

• Three to five years of corporate income tax relief
• Applicable to both new and existing companies
• Covers 71 industries and products

Free Trade Zones

Nigeria has established several Free Trade Zones (FTZs) to promote export-oriented investments. Companies operating within these zones enjoy various tax benefits.

Benefits Include:

• 100% tax exemption on all federal, state, and local government taxes
• Duty-free importation of raw materials and equipment
• 100% repatriation of capital, profits, and dividends

Rural Investment Allowance

This incentive aims to encourage businesses to locate in rural areas and promote even development across the country.

Allowance Rates:

• 100% for no electricity, water, or tarred road
• 70% for no electricity
• 50% for no water
• 30% for no tarred road

Research and Development (R&D) Incentives

To promote innovation and technological advancement, Nigeria offers incentives for companies engaging in R&D activities.

Key Incentives:

• 20% investment tax credit on qualifying R&D expenses
• Tax-deductible R&D expenses
• Accelerated capital allowances on R&D equipment

Gas Utilization Incentives

These incentives are designed to encourage investment in gas exploration and production.

Benefits Include:

• Three to five years tax holiday
• Accelerated capital allowance after the tax-free period
• Tax-free dividends during the tax-free period

Solid Minerals Incentives

The government provides incentives to companies involved in the exploration and exploitation of solid minerals.

Key Incentives:

• Three to five years tax holiday
• 95% capital allowance on qualifying capital expenditure
• Tax-free dividends for the first five years of operation

Export Incentives

To boost non-oil exports, Nigeria offers several incentives to export-oriented businesses.

Incentives Include:

• Export Expansion Grant (EEG) of up to 30% of repatriated export proceeds
• Export Development Fund for export promotion activities
• Duty drawback schemes

Small and Medium Enterprises (SMEs) Incentives

Nigeria provides specific incentives to support the growth of SMEs.

Key Benefits:

• Reduced company income tax rate of 20% for small companies
• Tax exemption for micro-enterprises with annual turnover below ₦25 million
• Pioneer Status Incentive available for innovative start-ups

These tax incentives demonstrate Nigeria's commitment to creating a favorable business environment and attracting investments across various sectors. Businesses operating or planning to invest in Nigeria should carefully evaluate these incentives to maximize their tax benefits and contribute to the country's economic development.