Understanding the New Tax Reforms in Nigeria
An estimated 98% of Nigerians will either stop paying tax or have their tax rate under the Pay As You Earn (PAYE) category reduced to its lowest possible level when the new tax law comes into effect in January 2026. This was one of the key points highlighted by Dr. Taiwo Oladele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, during a discussion session at the Nigerian Economic Summit in Abuja.
This statement drew widespread applause from the audience, especially given the current concerns about increasing economic burdens on citizens under the present government. According to Oladele, this figure represents approximately 33% of workers in both the public and private sectors combined, who will no longer pay PAYE due to exemptions. He added that between 33% and 98% will pay lower PAYE, while only 2% to 2.5% will pay more. These individuals are considered high-income earners, or “our rich people,” as he put it.
The Rationale Behind the Tax Reforms
Oladele explained that the reforms are necessary for the system to progress. He emphasized two main reasons: first, it is contradictory to tax people in poverty and expect them to become wealthy. Second, the reforms aim to establish clear categories such as the poverty line, middle class, and the wealthy. Although he did not provide exact income figures for the poor class, he elaborated on how the poverty level is determined.
He noted that determining poverty requires looking at the household rather than an individual. For example, if someone earns a certain amount, it’s essential to consider how many people depend on that income. Based on data from the National Bureau of Statistics (NBS), the average household size in Nigeria is five. Therefore, two out of five people are typically employed, and the income earned by these two must be sufficient to support the entire household without falling below the poverty line.
Oladele mentioned that the poverty threshold was set at between N100,000 and N120,000 per month for two people, which would allow the household to avoid poverty. He acknowledged that this amount might seem high to some in the room, but it is significant for those living in poverty. Under the previous laws, earning N30,000 per month meant paying taxes, but this reform aims to provide relief to the poor.
Income Categorization and Tax Rates
Above the poverty threshold, individuals earning up to N1.8 million per month are considered part of the middle class. Oladele explained that the middle class will pay less, while the low-income group will pay no tax. Those in the upper income bracket will pay slightly more.
The new tax regime also addresses the disparity between personal and corporate tax rates. In many countries, personal income tax rates are higher than corporate tax rates to encourage formalization. However, in Nigeria, the opposite is true. Operating informally means paying less tax, while formalizing a business increases the tax burden significantly.
This discrepancy has led to a large informal sector, which the government now aims to address. Under the new law, the top personal income tax rate will be reduced to 25%, although it remains lower than rates in neighboring countries like Ghana, Kenya, and South Africa. At the same time, the corporate tax rate will be lowered from 30% to 25%. This move aims to reduce the disincentive to formalize businesses.
Encouraging Formalization and Reducing Tax Evasion
The Corporate Affairs Commission recently announced free registration for 250,000 businesses, which aligns with the government’s efforts to promote formalization. Additionally, companies with annual turnover of N100 million or less will pay zero corporate tax. Some individuals may find this surprising, particularly those running large businesses not covered by the exemption.
Oladele also addressed the challenges of tax evasion, which he identified as a major issue. He explained that the task gap—the difference between current tax collections and potential collections—is made up of compliance issues and policy gaps. Addressing tax evasion is crucial not only for generating revenue but also for discouraging illegal activities.
Conclusion
The new tax reforms aim to create a fairer system that supports the poor, encourages formalization, and reduces the burden on small businesses. While the changes may seem controversial, they are designed to promote economic growth and equity. As the reforms take effect, their impact on the economy and citizens will be closely monitored.
