PERSONAL INCOME TAX

Learning Objectives

At the end of this topic, the student should be able to determine/compute:

 What makes up the taxable income of the individual taxpayer;

 The relief or allowances to be set-off against taxable income and;

 Tax computations

Taxation of Incomes of Individuals

The sources of incomes of an individual that are liable to tax include:

 Gains or profit from trade, business, profession or vocation;

 Emolument from employment including PAYE, benefits in kind and bonus;

 Dividend, interest or rent; and

 Any charge or annuity.

Place of Residence

The place of residence which is available for domestic use of such individual in Nigeria
on the first day in a relevant tax year. This does not include any hotel, rest house or
other place, that is a temporary residence unless no permanent place is available for
use on that day.

Where an individual has more than one place of residence on the relevant day, the
principal place of residence will include the following:

(a) Individual holding a Nigerian employment – the place where he normally resides.

(b) Individual holding foreign employment – the territory in which the principal office
of the employer is resident.

(c) Where there is earned income other than pension or employment – the state
where the individual is normally resident or the place nearest to his place of work
or the state where all the income is derived. The principal place will be the
Federal Capital if the income is derived from more than one state.

(d) Where there is unearned income – the principal place will be the place where the
individual usually resides

(e) Body of individuals – the place where the principal office is situated.
Employment Income

This is income earned by a person who is engaged by another under a contract of

employment. Income tax is paid under the Pay-as-You-earn (PAYE) system. It is the
responsibility of every employer to deduct income tax from the pay of his/her
employee for onward remittance to the relevant authority.

The returns of income and claim for allowances and reliefs are filed at the
commencement of each tax year by each employee with relevant tax authority. The
tax office would then calculate the allowances due to employee based on the
returns and enter these on the tax deduction card. This card together with the notice
of total free allowance are sent to the employer to be used to compute the amount
of tax to be deducted from the employee’s emoluments each month.

In arriving at the tax to be deducted monthly, the cumulative gross earning is usually
considered. This includes the aggregate of basic salary, overtime, bonuses, housing
allowances and transport, commission, etc. The total allowances up to the month
under consideration is deducted to arrive at the amount on which tax is payable.
The amount of tax due on this sum would be ascertained from the tax liable for that
particular month. It is important that any tax deducted from employee’s salary must
be remitted to the relevant tax authority within 10 days after the end of the month
under consideration.

An employer faces penalty of 10% of the amount outstanding plus interest at the
prevailing commercial rate where the employer fails to deduct the correct tax or
fails to remit the amount deducted from employee’s emolument.

Trade and Vocation Income

In subjecting a sole trader to taxation, the profit and loss account must be
established for the purpose of identifying taxable income and allowable expenses.
An expense will be allowable if it is wholly, reasonably, exclusively and necessarily
incurred for the purpose of the trade or business.

Assessable Income

This is the aggregate of the tax payer’s income from all sources after the allowable
deductions including losses. These include:

(i) Gains and profits from any trade, business or profession;

(ii) Employment emoluments such as salaries, wages, fees, and allowances

(iii) Interests and commissions, annuities and royalties;

 (iv) Gains and profits resulting from rent on property

(v) Share options granted to employees (however, liability will only arise when
option is exercised)

Income Exempt from Tax

This is the reimbursement to the employees of expenses incurred by him in the

performance of his duties and from which it is not intended that the employee
should make any profit or gain. Examples are:

(i) Refund of medical or dental expenses

(ii) Cost of uniform

(iii) Compensation for loss of office

(iv) Any reasonable removal or relocation expenses

(v) Any meal subsidy paid for by luncheon voucher or provided in a staff canteen.

(vi) Any cost of passage to and from Nigeria in respect of expatriates

(vii) Pension granted to a person

(viii) Retirement gratuities

(ix) Any dividend from a pioneer company

Benefits in kind

These are benefits other than cash enjoyed by employees in the course of their
employment. Examples of benefits-in-kind are:

Free company car;

Rented or hired equipment in the use of employment;

Asset in the accommodation provided by the employer; and

Electricity bills by the employer.

Any employee living in official quarters would be liable to rate-able value of such
quarters. Any other benefits attract tax chargeable at the rate of 5% of the cost of such
assets such as furniture and fittings and official car, or the market value of the asset at
the time of the acquisition (if cost cannot be ascertained).

Allowable and non-allowable deductions

Allowable deductions

In ascertaining the income derived from sole proprietorship, vocation, profession or any
other trading concern or self-employment, the PITA stipulates the following allowable
expenses:

(i) A sum payable by way of interest;

(ii) Rent for that period

(iii) Any expense incurred for repair of premises, plant or fixtures or renewal;

(iv) Bad debt or doubtful debt provision to the extent to which it is specific; and

(v) Expenses on research.

Non-allowable deductions

(i) Private expenses

(ii) Capital withdrawn from trades and any expenditure of a capital nature

(iii) Any loss or expenses recoverable under an insurance or contract of

indemnity.

(iv) Depreciation of asset

(v) Defalcation or pilferage by the employees so far as they are recoverable

under an insurance policy

(vi) Any reserve or appropriation of profits not allowed.

(vii) Tax penalties, traffic offence penalties

(viii) Withdrawal of stock for private purpose is not allowed. The market value of
such is added back

(ix) Entertainment expenses unless in respect of customers.

(x) Expenses of travelling from home to office by the employees are not allowed.
Travelling expenses while at work or between offices are allowed.

(xi) Donations are not allowed unless they are for benefit of the employees or to
approved charitable organizations as stated in the statues.

Reliefs and allowances

In arriving at the taxable or chargeable income, reliefs and allowances are granted
against the statutory total income which is the addition of the earned and unearned
income. The reliefs and allowances are as follows:

(i) Personal Allowance/Consolidated Relief Allowance

Every tax payer shall be allowed a consolidated relief allowance of N200,000

subject to a minimum of 1% of gross income whichever is higher plus 20% of
the gross income.

(ii) Children Allowance

This allowance would be claimed by a payer on children maintained in the

preceding year under the following conditions:

 The number of children must not exceed four

 None of the children must exceed the age 16. In a situation where the age is
more than 16, he must either be apprentice in a trade or must be undergoing
full-time education. It is important to know that one can claim child allowance on
an adopted child. The allowance is N2,500 per annum per child and subject to a
maximum of four children i.e. maximum of N10,000.

(iii) Dependent Relative Allowance

This is an allowance claimable by a relative who is incapacitated by old age

or infirmity. The allowance is now N2,000 (subject to a limit of two
dependents) i.e. N4,000.

(iv) Life Assurance Allowance

Tax relief is usually granted in respect of the premium paid by the tax payer
or his spouse on life insurance policy. There is no more limit on the amount
claimable on life assurance. Any premium paid is fully allowed.

(v) Disabled Person Allowance

This is an allowance granted to an incapacitated employee who uses special

equipment and the services of an attendant in the course of a paid
employment. The allowance is at present the higher of N3,000 or 20% of
earned income.

(vi) General Charges

These are allowable deductions for tax purposes. They include:

(a) Professional Subscription: any subscription paid to a professional body is

 allowed

(b) Alimony payment: this is an amount payable on a legally divorced wife and
the maximum amount is N1,000

(c) Mortgage loan interest: any interest on a mortgage loan obtained for the
purpose of building an owner-occupier structure is treated as a general
charge.

Illustration 1

Mrs Yellow Sisi is an employee of Zobo Limited with the following salary structure:

(a) Basic salary N14,400,000 per annum

(b) Rent allowance 40% of annual basic salary

(c) Transport allowance N1,200,000 per annum

(d) Meal allowance N2,500 per working day (assume 260

working days in a year)

(e) Entertainment allowance N520,000 per annum

(f) Utility allowance N480,000 per annum

(g) Leave allowance 15% of annual basic salary

(h) Christmas bonus one month’s basic salary

Additional information:

(a) She has an insurance policy on her life for which she pays an annual premium of
N96,000.

(b) She contributes 7.5% of her basic salary, rent allowance and transport allowance
annually to an approved pension scheme and 2.5% of her basic salary to the
National Housing Fund.

(c) She has an aged father and mother on whom she spends N120,000 annually
towards their maintenance.

(d) Mrs Yellow Sisi is a widow and has six children, namely:

i. Titi – aged 25 and is undergoing the National Youth Service Corps Scheme.

ii. Tata – aged 23 and has completed her education but is unemployed.
 iii. Tobi – aged 20 and is attending the University

iv. Tele – aged 17 and is married

v. Tofa and Tape aged 15 and 13 respectively.

Required:

Compute the tax payable by Mrs Yellow Sisi for 2020 year of assessment.

Solution

Mrs Yellow Sisi

Computation of Personal Income Tax Liability for 2020 Year of Assessment

N N
Basic salary 14,400,000
Rent allowance (40% × 14,400,000)
5,760,000
Transport allowance
1,200,000
Meal subsidy (2,500 × 260)
650,000
Entertainment allowance 520,000
Utility allowance 480,000
Leave allowance (15% × 14,400,000) 2,160,000
Christmas bonus (14,400,000/12)
1,200,000
Gross income
23,370,000
Less: CRA and tax-exempt deductions:
CRA (higher of 200,000 and 1% × 26,370,000 + 20% × 26,370,000
= 263,700 + 5,274,000 5,537,700
NHF contribution (2.5% × 14,400,000) 360,000
Pension contribution (7.5 × 21,360,000) 1,602,000
Life assurance 96,000
Children allowance (2500 × 3) 7,500
Dependent relative allowance (2,000 × 2) 2,000
7,607,200
Chargeable income 18,762,800
Tax liability:
First N300,000 @ 7%
21,000
Next N300,000 @ 11% 33,000
Next N500,000 @ 15% 75,000
Next N500,000 @ 19% 95,000
Next N1,600,000 @ 21% 336,000
Bal. N15,562,800 @ 24% 3,735,072
N18,762,800 Income tax liability 4,295,072

Illustration 2
Mr john Bull resigned his appointment from Tin Can Limited on 31st March, 2020 after
working for eight years. Prior to his resignation, his emoluments were as follows:

Basic salary 960,000 per annum

Rent allowance 800,000 per annum

Transport allowance 160,000 per annum

Meal subsidy 104,000 per annum

On 1st April, 2020, Mr. John Bull secured a new appointment as the Transport Manager
of Koko Transport Company Limited. His conditions of service include, inter alia:

(a) An annual basic salary of N1,920,000

(b) Free accommodation in the company’s rented duplex

(c) Use of company’s car specifically assigned to him

(d) Use of the services of domestic servants provided by the company. The
company spends N720,000 yearly for the wages of the domestic servants.

(e) Meal subsidy of N234,000 per annum

(f) Utility allowance of N42,000 per annum

The company rented a two-wing duplex at a rent of N450,000 per annum of which Mr
John Bull occupies one wing. The two-wing duplex has an annual rate-able value of
N120,000. It cost the company N720,000 to furnish the wing occupied by Mr John Bull.
He was required to refund 3% of his basic salary to his employer for the use of the
bungalow and furniture. The car assigned to him cost N2,800,000 when it was acquired
in January 2018, but had a market value of N2,240,000 on 1st June, 2020.

He has life assurance policy and pays an annual premium of N42,000. He contributes
N38,000 and N132,000 annually to National Housing Fund and approved contributory
pension fund respectively.

Required:

Compute Mr John Bull’s income tax liability for 2020 year of assessment.

Solution

Mr John Bull

Computation of income tax liability for 2020 year of assessment

N N

Basic salary (3/12 × 960,000 + 9/12 × 1,920,000) 1,680,000

Rent allowance (3/12 × 800,000) 200,000
Transport allowance (3/12 × 160,000 40,000
Meal subsidy (3/12 × 104,000 + 9/12 × 234,000) 201,500
Utility allowance (9/12 × 42,000) 31,500
Benefit in kind provided by employer:
Accommodation (9/12 × ½ × 120,000) 45,000
Furniture (5/100 × 9/12 × 720,000) 27,000
72,000
Less: rent paid to employer:
(3/100 × 9/12 × 1,920,000) 43,200 28,800
Car (5/100 × 9/12 × 2,800,000 105,000
Domestic servants’ wages (9/12 × 720,000) 540,000
Gross income 2,826,800
Less: CRA and tax-exempt deductions:
CRA (higher of 200,000 & 1% × 2,826,800
+ 20% × 2,826,800 = 200,000 + 565,360 765,360
Life assurance premium 42,000
NHF contribution 38,000
Pension fund contribution 132,000 977,360
Chargeable income 1,849,440

Tax liability:
First N300,000 @ 7% 21,000
Next N300,000 @ 11% 33,000
Next N500,000 @ 15% 75,000
Next N500,000 @ 19% 95,000
Bal. N249,440 @ 21% 52,382
N1,849,440 Income tax liability 276,382