MODULE THREE- PERSONAL INCOME TAX

Taxation of Individual
MODULE OBJECTIVES
This module is aimed at:

(i) Enlightening students on the basic principles involved in personal income tax
(ii) Educate students on the assessment of partnership business

LEARNING OUTCOMES
At the end of the module, students should be able to understand the basic principles involved in
the taxation of individuals in Nigeria. Understand the assessment of individuals to personal
income tax as well as assessment of partnership business.
I. Chargeable Income
The following are the various sources of income on which tax shall be payable by
individuals:
a) Gains or profit from trade, profession or vocation;
b) Employment income such as salaries, wages, fees, allowances, bonuses, premiums,
benefits in-kind or perquisites;
c) Any income from previous employment by way of pension.
d) Incomes derived from rights granted to third party for the use, occupation or
exploitation of an asset. Such as rent, royalities and premiums.
e) Any income from investment, such as dividend, interest, discounts and annuities
f) Any other profit, gain or income not mentioned above provided not derived from
criminal activities.
II. Earned Income: It is defined as income received from actual work done or services
rendered e.g. income from trade, business, vocation or profesion.
 It also includes income received from employment such as salaries and allowances,
perquisites as well as pension income derived from previous employment.
III. “Gross Emolument” means wages, salaries, allowances (including benefits in kind),
gratuities, superannuation and any other income derived solely by reason of
employment.
IV. Unearned Income: It is defined as income received or derived from investment or
rights granted to third party for the use or exploitation of assets such as dividend,
interest, rent, royalty etc.
V. Benefits-in-kind (BIK): These are expenses incurred by an employer for the personal
benefit of the employee.
 They are regarded as the non-monetary remuneration of an employeee e.g.
furnished living accommodation, gardener/stewards (domestic servants), use of
official car, installation of air conditioners or generator in employee’s residences.
  For the purpose of tax the employee is deemed to have earned income which is
liable to tax.
 BIK is taxable with effect from 1991.
 The benefits Taxable is determined as follows:
(a) Provision of Accommodation: Where an employee is provided with an
accommodation or official residence in Nigeria, the taxable benefit shall be the
annual ratable value of the premises as determined by local government authorities.
 Where the annual ratable value cannot be ascertained, the actual rent paid will be
regarded as the taxable benefit.

(b) Provision of Assets: Where an employee is provided with assets such as motor
vehicle, furniture and fittings, air conditioners etc, the benefit-in-kind to employee
is determined as follows:
 Where asset is owned by the employee, the taxable benefit is 5% of the cost
of the asset or 5% of market value where cost is not know.
 Where asset is hired or rented, the taxable benefit shall be the actual rent
paid or hire charge.
(c) Other Benefits: Where an employee is provided with the service of a
support/domestic staff such as drivers, gardeners, cooks, housemaid etc and an
allowance for maintenance of an asset.
 The benefit in kind shall be the actual amount incurred in form of salary paid by the
employer to provide such service.

Note: Benefit in kind is to be prorated based on:

 The period the employee enjoy the use of the asset
 In the case of an accommodation, the portion/part occupied by the employee
 Any contribution by the employee towards the provision of the benefit or asset.

VI. Income Exempted from Tax:

(i) Employment income such as:
 Leave allowance, subject to a maximum of 10% of the employee’s annual
basic salary
 Retirement benefits such as pension and gratuities received.
 Any compensation for loss of employment
 Passage cost or expenses to and from Nigeria incurred by the employee

(ii) Benefits-in-kind (BIK) such as:

 Provision of non-assignable luncheon vouchers or meals in any canteen.
 Provision of any uniform, overall or other protective clothing.
  Removal expenses incurred when the employee changes his place of
residence in the course of discharging his employment duties.
 Medical or dental expenses incurred and reimbursed to the employee.

(iii) Dividend such as:

 Dividend received from a pioneer company
 Dividend received from a company engaged in gas utilization
 Dividend treated as franked investment income
 Dividend received from a unit trust scheme
 Dividend received from a petroleum & petrochemical company

(iv) Interest Such as:

 Interest credited on a deposit account with less than N50,000.
 Interest credited on a foreign currency denominated account.

(v) Other Income such as:

 Income from bonds issued by government and corporate entities.
 Any income derived from outside Nigeria and brought into Nigeria by a
Nigerian resident in convertible currency through a domiciliary account in a
bank approved by the government.
 Any other income brought into Nigeria through the appropriate channel.

VII. Tax Exempt under Sixth Schedule to the Personal Income Tax (Amendment) Act,
2011:
(i) National Housing Fund Contribution (i.e. 2.5% of one month basic salary)
(ii) National Health Insurance Scheme
(iii) Life Assurance Premium (see details below)
(iv) National Pension Scheme Contribution (see details below)
(v) Gratuities.

VIII.Personal Reliefs and Allowance

The following are the statutory relief and allowances available to chargeable persons
under Personal income Tax (Amendment) Act, 2011:
(a) Consolidated Relief Allowance: This is granted to individual irrespective of sex or
marital status: The rate is higher of 1% of gross income or N200,000, plus 20% of gross
income.
(b) Alimony: Paid to a former spouse under an order of a court of competent juridiction in
the case of an individual whose marriage has been disolved subject to a maximum of
N3,000.
(c) Children Allowance: This is available to tax payers who maintained a child in the
preceeding year of assessment provided that:
 The child is not married.
 The child is not more than 16years of age.
 Where the child is above 16years, he or she must be attending a full time
educational institution or be an apprentice under a trade or profession.
 The child need not be a biological child.
 The allowance is currently N2,500 per child subject to maximum of four children.
(d) Dependent relative allowance: This is claimable by an individual on his dependent
relative. A dependent relative is the parent, in-laws, or relatives of tax payer
incapacitated by old age, or infirmity. The dependant must not be in receipt of an
income in excess at the rate of N2,000 per annuam. The relief is curently at the rate of
N2,000 per dependant relative subject to a maximum of two dependants.
(e) Life assurance policy allowance: This is granted in respect of premium paid on life
assurance policy on the life of the tax payer or spouse that secures a capital sum
payable at maturity. The relief is currently limited to the actual premium paid.
No relief will be granted in respect of assurance on the life of a child.
(f) Allowance for disabled person: This is granted to a disabled person who has a source
of earned income and employs the use of assistant or special equipment in the course of
deriving the income. The disabled person will be entitled to additional allowance which
shall be the higher of N3,000 or 20% of earned income.
(g) National Pension Scheme Contribution: The pension reform Act 2004 requires that
employer and employee to contribute 7.5% each of the employee’s insurable income
(basic, housing and transportation allowance). However, the pension reform Act 2014
which repealed 2004 Act, with effect from 2014 requires employer to contribute a
minimum of 10% while employee’s contribution is a maximum of 8% of insurable
income (basic, housing and transportation allowance) put together.
(h) Relief for donation to a research institution or centre: this will be available provided
the amount of the relief does not exceed 10% of the individual’s taxable/chargeable
income.
 Any amount that cannot be deducted as a result of the restriction cannot be
carried forward.
 It is arrived at by applying the formula (10/110 x taxable/chargeable income).
(i) Relief in respect of equity shareholding in a company and development company.
 Cost of equity participation by an individual in a company floated exclusively
for research and development shall be allowed as a deduction from net total
income provided such deduction shall not exceed 25% of statutory total
income for that year.
  Any amount that cannot be deducted as a result of the restriction can be
carried forward to subsequent years and be relieved from net statutory total
income.

NOTE: In the light of the consolidation of reliefs in the 2011 amendment to PITA, the Finance
Act has deleted references to the reliefs for children and dependants.
IX. Withholding Tax
Witholding tax is the deduction of tax at source from certain income or transactions.
Witholding taxes deducted from certain incomes are regarded as the final tax liability
on such incomes.
Such incomes are referred to as “franked investment income”. The implication of
franked investment income is that the recipient of such income is not liable to further
tax apart from the deduction at source.
For the purpose of personal income tax computation, the franked investment income
must be included to determine the statutory total income of the individual.

X. PERSONAL INCOME TAX COMPUTATION FORMAT

Earned Income N N
Employment income
Salaries and Wages x
Benefit-in-kind x
Pension x x
Business Income
Trade x
Profession x
Vocation x x
Less: Exempt Income
Deductible Allowances x
Deductible Expenses x (x)
Total Earned Income (A) x
Unearned Income
Dividend (Gross) x
Interest (Gross) x
Rent (Gross) x
Royalty (Gross) x
Total Unearned Income (B) x
Gross/Statutory Total Income (c) = (A + B) xx
Less: Reliefs & Allowances
Consolidated Relief Allowance (see above) x
Life Assurance Premium (see above) x
Shareholding in R & D institution Allowance x
Donation to Research Centre Allowance (see above) x
Interest on Mortgage loan x
Total Allowable deductions (D) x (x)
Net Total Income (E) = (C – D) xx
Less: Franked investment Income (F11):
Dividend (Gross) x
Interest (Gross) x
Total F11 (F) x (x)
Taxable Income (G) = (E – F) xx

Apply Tax Table as applicable

First N300,000 @ 7% x
Next N300,000 @ 11% x
Next N500,000 @ 15% x
Next N500,000 @ 19% x
Next N1,600,000 @ 21% x
Next N3,200,000 @ 24% x
Tax payable (H) xx
Add: WHT on Rent (I) = (Gross amount x 10%) x
Tax Liability (J) = (H + I) xx

Minimum Tax

If after all deductions, a taxable person (i.e. the individual) has no chargeable income or
where the tax payable on the chargeable income of the individual is less than 1% of his gross
income, the individual shall be charged to tax at the rate of 1% of his gross income.

ILLUSTRATION
Mallam Sule Yusuf is an employee of Temidire Limited. His salary is N500,000 per annum. He
is married with five children. The first two are from his first wife and the remaining from the
second wife. The two wives live with him. The eldest child is now a university graduate and
teaches in a secondary school in Kaduna while the remaining children are university students.
Malam Sule Yusuf has a life assurance policy with Jabu Insurance Limited. The sum assured is
N250,000 and he pays a premium of N2,500 per month. He also contributes N1,000 monthly to a
pension scheme approved by the Joint Tax Board. The following information is made available:
(a) The company pays N180,000 per annum on his accommodation and provides him with an
official car which has a market value of N2,000,000.
(b) He spent N6,000 on his aged father and N7,000 on his aged mother. Both have no source of
income due to old age.
(c) He was retired on 31 December 2010 and was paid a gratuity of N300,000.
(d) He was also paid a lump sum of N100,000 for loss of office.
Required:
Compute his tax liability for the relevant year of assessment.

SOLUTION
MALLAM SULE YUSUF
COMPUTATION OF TAX LIABILITY FOR 2010 ASSESSMENT YEAR
N N
Salary 500,000
Benefit-in-kind:
Company accommodation 180,000
Official Car 100,000 280,000
Gratuity 300,000
Gross Income 1,080,000

Less Reliefs:
(i) Consolidated Relief Allowance:
N200,000 OR 1% of N1,080,000,
which ever is higher + 20% of N1,080,000 416,000
(ii) Gratuity 300,000
(iii) Life Assurance Relief 30,000
(iv) Contribution to Pension Scheme 12,000 758,000
Chargeable Income 322,000
Tax Payable
N
First N300,000 @ 7% 21,000
Next N22,000 @ 11% 2,420
Tax Payable 23,420

ASSIGNMENT
Mrs. Amara Onyemachi retired as a Director in the Federal Ministry of Justice on 31 December
2011. On retirement, she was paid a gratuity of N30,000,000.
On 1 January 2012, she was employed by Septraco Limited as the Company Secretary, on a
salary of N60,000,000 per annum. Mrs. Amara Onyemachi is married and has five children. The
following information was also provided at the end of her first year in her new employment:
(i) The eldest son, Onyebuchi, is gainfully employed with Golf Bank Limited.
(ii) The company provides Mrs. Amara Onyemachi with an official car – Toyota Prado- with a
market value of N15,000,000.
(iii) The company pays N7,500,000 per annum on her official accommodation.
(iv) Mrs. Onyemachi has a life assurance policy with Mutual Assurance Plc. The sum assured is
N50,000,000, while premium paid is N6,000,000 in 2012.
(v) She contributed N400,000 monthly to an approved Pension Scheme.
(vi) She spent N150,000 during the year for the upkeep of his two aged parents who have no
source of income.
Required:
Compute Mrs. Amara Onyemachi’s monthly and annual tax liabilities for the relevant year of
assessment.