Nigeria's tax landscape is set for a significant overhaul with the introduction of the Tax Act 2025, scheduled to take full effect from January 1, 2026. This legislation represents one of the most comprehensive reforms to the nation's tax system in recent years, directly impacting millions of salary earners, freelancers, and business owners across the country.
Who is Affected and Who is Exempt?
The new law provides much-needed clarity on the taxation of employment and side-hustle income. According to Section 13 of the Act, employment income is taxable in Nigeria if the employee is resident in the country, or if the employment duties are performed in Nigeria and the remuneration is paid by a Nigerian employer. This also covers non-resident employees, Nigerian government staff working abroad, and seafarers.
However, the law introduces important exemptions. Workers earning the national minimum wage or less will be fully exempt from income tax. Furthermore, the wages and salaries of military officers are completely tax-free. Other exempted payments include death gratuities and redundancy payments.
Understanding Taxable Income and New Rate Bands
The Act clearly defines what constitutes taxable income for employees. This now includes salaries, bonuses, allowances, and specific benefits-in-kind (BIK) such as housing and car benefits provided by an employer. Items like meal vouchers, uniforms, and tools remain non-taxable.
For employed workers, several deductions are allowed before tax is calculated. These include pension contributions, National Housing Fund (NHF) payments, health insurance, interest on housing loans, life insurance premiums, and a rent relief of 20% (capped at N500,000).
The reformed tax system introduces a progressive rate structure for individuals after all allowable deductions are applied:
- 0% on the first N800,000 of annual taxable income.
- 15% on the next N2.2 million.
- 18% on the next N9 million.
- 21% on the next N13 million.
- 23% on the next N25 million.
- 25% on any amount above N50 million.
This structure ensures that the more a worker earns, the higher the percentage of tax they pay, aligning with principles of progressive taxation.
Rules for Freelancers and Mixed Earners
The Tax Act 2025 specifically addresses the growing gig economy. Freelancers, consultants, artisans, and content creators can deduct legitimate business expenses such as shop rent, employee salaries, fuel, repairs, tools, internet/data costs, and research & development. Personal expenses, capital expenditure, fines, and unapproved pension payments are not allowable.
A significant change is the requirement for individuals earning both a salary and business income to combine all sources—employment, business, investment, and rental income—before applying deductions and the new tax bands. This creates a unified tax assessment for mixed earners.
For micro-businesses and freelancers with insufficient records, the Act introduces a presumptive taxation system, allowing tax authorities to estimate liability based on available information.
Practical Steps and Expert Insight
Kunle Ademola, a Lagos-based tax consultant, praised the Act for aiming to simplify Nigeria's complex tax system. "The Act is progressive and ensures fairness across all income levels," Ademola stated. "It provides clarity for freelancers and business owners who were previously unsure about their obligations. Salary earners should verify their payroll deductions, and self-employed individuals must maintain clear financial records to avoid penalties."
Taiwo Oyedele of the Presidential Tax Committee clarified key administrative points. He confirmed that individual taxes will be handled by state governments, while company taxes remain a federal matter. He also strongly debunked widespread misinformation, stating that the federal government has no plans to debit individuals' bank accounts directly for tax payments.
For salary earners, calculating tax under the new system involves key steps: summing annual gross income (salary, allowances, bonuses), subtracting allowable deductions (Pension, NHF, Consolidated Relief Allowance), and applying the new progressive rates to the remaining taxable income.
The federal government has also streamlined the payment process, unveiling four digital platforms to make tax payments more convenient, transparent, and accessible for all Nigerians.
