Nigeria's One Big Beautiful Bill?
The new income tax rates in Nigeria contain something of a surprise
Important to start this post with a caveat: You will never find me calling for more or higher taxes. I live in the UK where I hand over a big chunk of my income every year in taxes, and no, I don't do it with a song in my heart. I consider myself an upstanding citizen, so whatever the government demands, I pay (however grudgingly). This post isn't a manifesto for higher taxes. I'm simply discussing something I find interesting while remaining studiously neutral on actual tax levels.
Nigeria just passed a bunch of tax reform laws. On the face of it, they are a pretty good effort at trying to get Nigeria’s tax laws to work better. Broadly, four next tax laws were signed by President Tinubu last week. Here’s the summary from the BBC:
The four new laws are:
The Nigeria Tax Act, which merges various rules into a single, easier-to-understand code and eliminates more than 50 small, overlapping taxes. The presidency has said that reducing the number of taxes and eliminating duplication, will making doing business easier
The Tax Administration Act, which sets common rules for how taxes are collected across federal, state, and local governments
The Nigeria Revenue Service Act, which replaces the Federal Inland Revenue Service (FIRS) with a new, independent agency - the Nigeria Revenue Service (NRS)
The Joint Revenue Board Act, which improves co-ordination between levels of government and creates a Tax Ombudsman and Tax Appeal Tribunal to resolve disputes
Together, these laws aim to create a fairer and more efficient tax system across the country, the Nigerian government says.
The last three are mainly administrative shake-ups of the tax setting and collection systems. The meat of the reforms - and what we'll discuss here - is in the Nigeria Tax Act (NTA), specifically the changes to Personal Income Tax (PIT).
I confess that, like everyone else, I was distracted by the noise around the (ultimately doomed) VAT changes and didn't really pay attention to the personal income side. But the changes seem substantial and worthy of discussion.
Broadly speaking, the NTA proposes (I'm assuming this matches what President Tinubu signed - in Nigeria, incredible things have been known to happen between sending a bill to the President and him signing it) that anyone earning N800,000 or less ($500, £400) per year will pay no income tax. That amount effectively becomes the new tax-free threshold in Nigeria. It then states that "higher earners" will be taxed at 25%, which is effectively the higher rate. We'll return to this shortly, but here's what PIT looked like before this reform, per PwC:
Thirteen years ago, I wrote a piece when that tax law was signed into law by President Jonathan. My view at the time was that there were simply too many tax bands for a country at Nigeria’s stage of development. Anyway it survived in that form until last week.
When does the taxman come for you?
One question to ask is when does the top rate of tax get triggered in a country's tax code? Using the UK as an example, average income is £36,700. The top rate of tax (45%) kicks in when you earn anything over £125,140 i.e. you start paying the top rate when you earn 3.4x what the average person earns. The UK tax system has its own problems, so take this only as a guide. The zero rate of tax in the UK is £12,570, so the top rate kicks in at roughly 10x the zero rate. This varies from country to country: in Kenya (which doesn't have a zero rate), the top rate kicks in at 33x the lowest rate. In South Africa it's 8x the lowest rate while in India it's 6x (with an additional surcharge for high earners). From the table above, we see that before the new NTA, the top rate kicked in at roughly 11x the zero rate.
One way of thinking about this is as a social contract litmus test. The lower the multiple, the more the state is trying to get as many people as possible to contribute to whatever taxes pay for. It's a kind of vote of confidence in social solidarity where the government is trying to rely less on high earners alone to pay for stuff. Your mileage may vary, and you may view this as punitive taxation on success because when the top rate arrives early, it catches a software engineer in the same bracket as a hedge fund manager. Be that as it may, that's broadly what the multiple is saying.
If you scrolls all the way down to page 2094 in the attached document, you see the new tax table looks like this:
The top tax rate now kicks in at 63x the zero rate. On the face of it, tax appears to have increased for high earners by 1 percentage point - the new top rate is 25% versus the previous 24% but this masks something deeper. The challenge with comparing Nigerian tax rates is the huge elephant of inflation and devaluation. N3.2m in 2012 when the previous PIT was passed bears no resemblance to N3.2m today. The best way to iron out this wrinkle is to convert to dollar terms.
That was then, this is now
In 2012, the exchange rate was roughly N160 to $1. The top 24% tax rate kicked in when you crossed $20,000 per annum. Today the exchange rate is around N1,600 to $1 (crazy just typing that out!). Earning $20,000 now works out to N32m, which puts you in the 23% tax bracket i.e. a 1% tax cut. To pay the top 25% rate, you must earn $31,250, or 56% more than in 2012. However you look at it, this is a significant tax cut for high earners.
In 2012, Nigeria was experiencing a mini economic boom driven by high oil prices and a general go-go environment. More Nigerians were surely earning $20,000 (and thus paying the highest tax rate) in 2012 than are earning $31k today after one of the most severe economic downturns in living memory. The comparison gets starker: in 2012, Nigeria's GDP per capita was around $2,700 (using IMF numbers), so the top tax rate kicked in at roughly 7x GDP per capita. Today, at a GDP per capita of $900, you need to earn 35x GDP per capita to pay the top rate. This point can be illustrated with the Economist Intelligence Unit chart below which shows the dramatic fall in the number of high earners in Nigeria over the last decade and a half:
Are there more ways we can view this? PiggyVest, the savings and investment juggernaut popular with young Nigerians in particular, publishes an annual savings report. In the most recent 2024 version, they asked more than 10,000 people to tell them how much they earn. Here’s what the answers looked like (these are monthly figures):
How about Cowrywise? Last year they published a report on Nigeria’s High Net Individuals (HNIs), someone whose aggregate net worth of investment assets exceeds N100m. The income distribution looked like this:
Both of these reports are not far off each other: an income of N12m or more gets you into the top 2% in PiggyVest’s report while N48m and above gets you into the top 1% in the Cowrywise version. I think the point is well made.
Given the introduction of an entirely new band, we can only directly compare some of the new and old tax bands. In the old PIT, you started paying the 21% rate when you crossed $10,000. Now you'll pay it once you cross $8,125. Likewise, the 15% rate kicked in when you crossed $3,125 income in 2012 but now kicks in from $1,375. For the sake of fairness, we should describe this as a tax rise on those further down the income bracket.
Tax cuts for thee, tax cuts for me
But if you're a high earner, this new tax bill is pretty good for you. Nigeria’s top rate now sits so far up the scale that almost nobody will ever pay it. I imagine a few Nigerian states will see no one paying tax at 25%.
What does this all mean? As I say, I'm neutral on raising taxes in general. Still, I'm somewhat surprised there was hardly any debate on this aspect of the NTA. The changes to the top rate of tax are fairly dramatic. In Nigeria's devolved system, income taxes are collected by states, so I would have expected governors to generate a racket about this given it's a missed opportunity to increase their tax take. But then again, Nigerian states are in the rudest financial health they've ever been (a topic for another day), so maybe they didn't care that much. Maybe the nominal disguises the real effect for middle to lower earners, hence why there's been no noise from them. If you're currently earning N2.3m for instance, the highest rate of tax you're paying is 21%. Once this law comes into effect, you drop into the 15% bracket, which looks like a tax cut for you.
We'll probably only know the true effect once the tax rates kick in and the various state tax authorities start reporting on what they collected. Will the amount of tax collected go up, or will everyone suddenly start acting surprised when the amount collected drops?
We'll find out soon enough.
‘The lower the multiple, the more the state is trying to get as many people as possible to contribute to whatever taxes pay for’. This articulates it best. Just adds to the evidence that tax payment as both a form of social contract and revenue generation was never part of the Nigerian framework. Thanks for simplifying these aspects.
Also, I actually like that corporate rates were reduced but the so called “development” levy would reduce the effective reduction. But a reduction it is still how ever slightly.
I feel that Nigeria should have gone for an Irish style low rate of at least 10% with deeply generous capital expensing (100%+) which is expensed immediately and not over time. The capital expensing schedules I saw in the version of the bill floating around last year are too low and are done over a period of years.
An Irish style corporate tax rate, with super generous capital expensing, along with with corporate tax incentives for the list of industries listed in the bill for incentives, implemented immidiately could usher back in much needed growth.