As the countdown to the January, 2026 effective take off of two landmark Tax Reform laws gathers steam, wrong narratives and misconceptions about aspects of the new tax laws have also been on the increase. While some of the misconceptions are borne out of innocent ignorance, others are mostly from a place of political mischievousness.
In this Explainer, I will be addressing the misconceptions around the income tax provisions in the Nigeria Tax Act, 2025.
Over the past couple of months, I have noticed the following misconceptions and wrong narratives around the issue of income tax, many of which emanate from individuals or businesses who have clearly been evading income taxes:
1. Nigerians pay higher income taxes from January 1, 2026
2. Money in individual bank accounts would be automatically taxed by the government
3. Federal government is desperate to raise revenue by taxing the income of Nigerians heavily.
4. Tax laws will stifle productivity
I will briefly touch on each of these misconceptions, providing clarifications in layman terms.
1. HIGHER OR LOWER INCOME TAXES FOR INDIVIDUALS?
The reality is that the income tax paid by MAJORITY of Nigerians will reduce following the new personal income tax provisions in the Nigerian Tax Act, 2025 that exempted individuals earning N800,000 and below per annum from paying income tax. What this means is that Nigerians earning minimum wage or below will pay zero income tax.
I understand some will argue that minimum wage is N70,000 per month, which translates to N840,000 per annum and ordinarily means a minimum wage earner still has N40,000 above the N800,000 exemption threshold that is subjected to an income tax of 15% under the new tax law. That is correct, but here is the catch, there is what is called TAXABLE INCOME and is not necessarily equivalent to the total income of an individual.
Taxable income is simply the part of the total income that can be taxed after allowable deductions have been made. Under the NTA 2025, you can deduct the following from your GROSS income to get your TAXABLE income:
a) NHIS contribution (5% of salary for most employees)
b) Annual rent (corresponding to 20% of the rent up to a maximum of N500,000)
c) National Housing Fund deduction (2.5% of gross pay)
d) Employee Pension contribution (8% of employee salary)
e) Life insurance premium for you and your spouse
In other words, a minimum wage earner claim some or all of these deductions and these will certainly drive down the taxable income within the exemption threshold of N800,000 per annum.
Let us do a practical calculation for an individual earning N70,000 monthly (minimum wage) who pays an annual rent of N200,000 in addition to NHIS, NHF and contributory pension deductions.
His gross annual income = N840,000
Pension contributions = N67,200
NHF deduction = N21,000
NHIS deduction = N42,000
20% of Annual Rent = N40,000
By the time you make these allowable deductions from the N840,000 gross income, the individual’s TAXABLE INCOME becomes N710,800. This falls well within the exemption threshold which means the individual will not pay any income tax.
If an individual earns N80,000 monthly, and we use similar deductions for NHIS, NHF and CPS while raising annual rent to N300,000 with 20% amounting to N60,000, the individual will still be exempt from paying income tax as the taxable income would be N799,200 – within the N800,000 tax exemption threshold.
Even when we calculate for an individual earning an annual gross income of N1.2m, the individual may even fall within the tax exempt status depending on the deductions he or she claims or at worst the individual may just be taxed an effective tax rate of 2.5% under the new law as against 4.6% under the old law.
The tax band is progressive in nature and only makes the rich with reasonably much higher annual gross income to pay a little more than before, which is a fair system.
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