What is Personal Income Tax?
Personal income tax (PIT) is the tax imposed on the income of individuals, corporate sole or body of individuals, partners in partnership business, trustees or executors of any settlement or estate.
Personal income tax in Nigeria is on a Pay As You Earn Basis (PAYE) which means that the tax is deducted at source by the employer as the employee earns the income.
It is the responsibility of the employer to deduct the tax from employee’s salaries and remit it to the relevant State Internal Revenue Service (S-IRS) or FCT-IRS in the case of employees resident within the FCT.
Administration of PIT in Nigeria
The administration of PIT in Nigeria is based on the principle of residency. This means PIT is payable to the state of residence of the taxpayer. In view of this, PIT in Nigeria is administered by state internal revenue services/FCT-IRS in respect of their residents. Tax is however administered by FIRS on non-residents, members of the Armed Forces, Police and Officers of Nigerian Foreign Service.
For example, the PIT of Mr Danladi – a construction worker who is resident in Nasarawa State but works in Abuja will be remitted to Nasarawa State Internal Revenue Service and not FCT-IRS in line with the residency rule. But for Mr John who is an indigene of Ondo State and a police officer serving in Akwa Ibom State, his PIT will be remitted to the FIRS regardless of his state of service in view of the fact that he is a police officer.
Chargeable Income for PIT Purpose
There are two dimensions of chargeable income for PIT Purpose. These are taxable employment income and taxable business income.
- Taxable Employment Income – This refers to the gross income covering salaries, wages, fees, allowances or other gain or profit from employment including compensations, bonuses, premiums, benefits in kind, gratuities, superannuation, and any other income derived solely by reason of employment, less non-taxable income which is income on which no further tax is payable and tax-exempt items.
It is important to note that Benefits in Kind (BIK) such as official cars, accommodation, etc provided to an employee by the employer are considered to be part of the employee’s total emoluments for a particular period for PIT purpose.
- Taxable Business Income – This includes business income derived by individuals, business enterprise, partnership, trusts and other unincorporated entities which have business place of operations in Nigeria less allowable business expenses and capital allowances.