Computation of personal income tax

Basis of assessment
The basis of assessment used by the relevant tax authority for the determination of personal income
tax liability of an individual shall be on actual year basis. It is however pertinent to note that in
determining the gross income of an individual, income from employment is based on actual year basis,
while unearned incomes and trading income are based on preceding year basis.

Tax-exempt deductions
The following deductions are tax exempt:
➢ National housing fund contribution
➢ National health insurance scheme
➢ Life assurance premium
➢ National pension scheme
➢ Gratuities: Gratuity is money paid to an employee who is retiring or leaving his employer after
several years of service. Gratuity is tax deductible.

Computation of consolidated relief allowance

“Gross emolument” means wages, salaries, allowances (including benefits-in-kind), gratuities,
superannuation and any other income derived solely by reason of employment. “Gross income” means
income from all sources less non-taxable income. Consolidated relief allowance (CRA) is granted at
the higher of ₦200,000 or 1% of gross income plus 20% of gross income.

Rate of tax
The graduated rates currently applicable are as follows:

Income to be taxed Rate of tax Per centum (%)

For every naira of the First 300,000 7k per ₦1 or 7
For every naira of the next 300,000 11k per ₦1 or 11
For every naira of the next 500,000 15k per ₦1 or 15
For every naira of the next 500,000 19k per ₦1 or 19
For every naira of the next 1,600,000 21k per ₦1 or 21
For every income above 3,200,000 24k per ₦1 or 24

Determination of personal income tax

In computing the personal income tax liability of an employee, the following format can be used as a
guide:
N N
Earned income:
Employment income x
Gratuity x
Income from trade or other sources x
xx
Unearned income:
Dividend (gross) x
Rental income (gross) x
Interest (gross) x
Royalties (gross) x
Total income xx
Non-taxable incomes x

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Income on which no further tax is payable x (xx)
xx
Tax exempt items:
National housing fund contribution x
National pension fund contribution x
National health insurance scheme contribution x
Life assurance premium x
Gratuity x (xx)
Gross income xx
Consolidated relief allowance (CRA) (x)
Chargeable income xx

Taxation of sole traders/self employed individuals

Computation of gross income, chargeable income, and tax liabilities

N N
Net profit/ (loss) xx
Add back: Disallowable expenses x
Taxable income not reported x xx

Deduct: Non-taxable income x

Franked investment income x
Allowable expenses not reported x xx
Adjusted or assessable profit xx
Losses b/f x
Relieved x (x)
Losses c/f x
Xx
Balancing charge x
xx
Capital allowance b/f x
Capital allowance for the year x
Balancing allowance x
xx
Relieved (x) (x)
Unrelieved capital allowance c/f x
xx
Tax exempt items:
National housing fund contribution x
National pension fund contribution x
National health insurance scheme contribution x
Life assurance premium x
Gratuity x xx
Gross income xx
Less consolidated relief allowance x
Chargeable income xx
Computation of personal income tax
First N300,000 @ 7% x
Next N300,000 @ 11% x
Next N500,000 @ 15% x
Next N500,000 @ 19% x

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 Next N1,600,000 @ 21% x
Over N3,200,000 @ 24% x
Tax liability x
Less: Withholding tax earlier deducted x
Final tax payable xx

Example 1:
Mr. Yaya Ogunsowo, an employee of Cool Beauty Products Limited, has the following salary package
for the year ended December 31, 2020:
❖ Salary ₦6,500,000 per annum;
❖ Enjoyed the service of two domestic servants and a night guard fully paid for by the company as
follows:
➢ 2 Domestic servants – ₦200,000 each
➢ Night guard – ₦150,000
❖ Collected a sum of ₦88,250 during the year as reimbursement of travelling expenses for official
assignments;
❖ Lived in a company house rented for ₦450,000 per annum;
❖ Used an official car purchased at a cost of ₦3,400,000 by the company.
Further information about him:
i. Married with two children of school age
ii. Has an aged mother whom he maintained with ₦30,800 per annum
iii. Paid the sum of ₦48,000 as life assurance premium
iv. The rateable value of his residence is ₦250,000.
v. Dividends received (net of withholding tax) from shares in a blue-chip company:
Paid 5/7/2019 99,000
Paid 31/12/2019 63,000
Paid 30/6/2020 90,000
Paid 31/12/2020 95,000
Required: Compute his tax payable for the relevant tax year.

Solution
Mr. Yaya Ogunsowo
Computation of personal income tax liability For 2020 assessment year
₦ ₦
Earned income:
Salary 6,500,000
Benefits-in-kind:
Domestic servants (₦ 200,000 x 2) 400,000
Night guard 150,000
Accommodation 250,000
Company’s car (₦ 3,400,000 x 5%) 170,000 970,000
7,470,000
Unearned income
Dividend (gross) (₦ 99,000/0.9 + ₦63,000/0.9) 180,000
Total income 7,650,000
Dividend (gross) (180,000)
7,470,000
Less: Tax exempt item:
Life assurance relief 48,000
7,422,000
Less: Consolidated relief allowance
(₦ 200,000 + 20% of ₦ 7,422,000) (1,684,400)
Chargeable income 5,737,600

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Computation of personal income tax payable
₦
First ₦ N300,000 at 7% = 21,000
Next ₦ 300,000 at 11% = 33,000
Next ₦ 500,000 at 15% = 75,000
Next ₦ 500,000 at 19% = 95,000
Next ₦ 1,600,000 at 21% = 336,000
Next ₦ 2,537,600 at 24% = 609,024
Personal income tax payable 1,169,024

Example 2:
Dominion Enterprises commenced on January 2, 2020, and makes up accounts to March 31, every
year.

The assessable profits as provided are as follows:

N
January 2, 2020 to March 31, 2020 41,300,050
April 1, 2020 to March 31, 2021 52,750,000

Required:
Compute the gross income of the business that is assessable for the relevant assessment years.

Solution
Dominion Enterprises

Computation of gross income For assessment years 2021 and 2022

Year of Assessment Basic Period Assessable Income

2021 2/1/20 – 31/3/20 41,300,050

2022 1/4/ 2020 – 31/3/2021 52,750,000

Example 3:
Dr. Eniola Ajayi, who resides in Lagos, has been trading for several years. The statement of profit or
loss of her business for the year ended December 31, 2021, is as shown below:
₦ ₦
Gross profit 50,000,000
Profit on sale of vehicle 1,200,000
51,200,000
Less: Expenses
General administration 3,000,000
Staff salaries 12,219,500
Stationery and printing 800,000
Postage and telephone 400,000
Electricity 700,000
Entertainment 250,500
Vehicle repairs and maintenance 455,000
Bank charges 800,000
Donations 4,500,000
Periodical and technical journals 80,000
Audit and accountancy fee 2,500,000

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Defalcation and embezzlement 1,200,000
Repairs and renewals 85,000
Depreciation 5,010,000
VAT paid on equipment 2,800,000
Bad and doubtful debts–Specific 200,000 (35,000,000)
Net Profit 16,200,000
You are provided with the following additional information:
a. Legal expense of ₦360,000 formed part of staff salary instead of capital Items
b. Donations made to The Boys Scout of Nigeria
c. She agreed with the inspector of taxes that one third of vehicle repairs and maintenance related to
private use
d. Further examination of accounts revealed that salary of ₦ 800,000 was paid to an unknown person
e. The Chief Accountant perpetrated 75% of the defalcation
f. Allowable expenses of ₦ ₦230,000 have been omitted from the accounts
g. Repairs and renewals comprised of: ₦
Partitioning of new office 30,500
Repairs to plant and machinery 25,000
Repairs of office roof 29,500
85,000
h. Agreed capital allowances on qualifying capital expenditure amounted to ₦7,500,000.

Required:
(a) Compute the gross income of Dr. Eniola for the relevant tax year.
(b) State three conditions that must be met before donations can be allowed as an expense.

Solution
Dr. Eniola Ajayi
Computation of gross income for 2021 tax year
₦ ₦
Net profit as per accounts 16,200,000

Add back: Disallowable expenses:

Staff salary – capital item 360,000
Vehicles repairs and maintenance – privateuse1/3 x ₦ 455,000 151,667
Salary – paid to unknown person 800,000
Defalcation – 75% x ₦ 1,200,000 900,000
Repairs and renewal – partitioning cost 30,500
Depreciation 5,010,000
VAT 2,800,000 10,052,167
26,252,167
Less: Non-taxable income
Profit on sale of vehicle (1,200,000)
Less: Allowable expenses omitted (230,000) (1,430,000)
24,822,167
Deduct capital allowances 7,500,000
Earned Income/Adjusted Profit 17,322,167
Consolidated relief allowance (CRA)
Higher of 1% x ₦ 17,322,167 or ₦ 200,000
whichever is higher, + 20% x N17,322,167 (3,664,433)
Gross income 13,657,734

Example 4:

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Dr. Zuba Zuniga has been the sole proprietor of his business for several years. His detailed statement
of profit or loss for the year ended December 31, 2021, is as follows:
Revenue ₦ ₦
Gross trading profit 30,000,000
Dividend (gross) 2,500,000
Rental income (gross) 800,000
Profit on sale of non-current assets 1,200,000
34,500,000
Less: Expenses:
Salaries and wages 3,500,000
General expenses 1,600,000
Finance costs 900,000
Rates and electricity 500,000
Repairs and maintenance 2,500,000
Depreciation 4,800,000
Bad debt 2,000,000 (15,800,000)
Net profit 18,700,000

Additional information: ₦
i. Salaries and wages include:
Salary paid to Mrs Zuniga who is a full time employee of the company 350,000
Wages to Mrs Zuniga’s house maid 50,000
Salaries of other employees 3,100,000
3,500,000
ii. General expenses include:
Subscription of trade magazines 200,000
Cost of company branded gifts 750,000
Fines paid for traffic offence committed by Mrs. Zuniga 100,000
Stationery 250,000
Hire of generator set for Mr. Zuniga’s private residence 300,000
1,600,000
iii.Finance cost include ₦ 200,000 in respect of Mr. Zuniga’s private loan.
iv.Mr. Zuniga has a life insurance policy on his life for which he pays an annual premium of ₦
350,000.
v.Mr. Zuniga made contribution of ₦ 150,000 to National Health Insurance Scheme (NHIS) during
the year.
vi.Mr. Zuniga has 3 children and also maintained his aged parent.
vii.Capital allowance agreed with the relevant tax authority is ₦ 5,500,000.

Required:
(a) Compute adjusted profit for the relevant tax year
(b) Compute the tax liability and tax payable by Mr. Zuniga for the relevant tax year.
(WHT rate on dividend and rent is 10%)

Solution
Mr. Zuniga
Computation of adjusted profit for 2021 tax year
₦ ₦
Net profit 18,700,000

Add: Disallowable expenses:

Salaries and Wages paid to Mrs. Zuniga’s maid 50,000
Fines paid for traffic offence committed by Mrs. Zuniga 100,000

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Hire of generating set for Mr. Zuniga’s private residence 300,000
Interest in respect of Mr. Zuniga’s private loan 200,000
Depreciation 4,800,000 5,450,000

Less: Non-taxable income

Dividend (gross) 2,500,000
Profit on sale of non-current assets 1,200,000 (3,700,000)
Adjusted profit 20,450,000

Mr. Zuniga
Computation of tax liability and tax payable for 2021 tax year
₦ ₦
Trade income 20,450,000
Less: Capital allowance (5,500,000)
14,950,000
Tax exempt items:
Life insurance premium 350,000
NHIS contribution 150,000 (500,000)
14,450,000
Consolidated relief allowance:
Higher of: 1% of ₦ 14,450,000 or ₦200,000,
which is higher, plus 20% of ₦ 14,450,000 (3,090,000)
Gross income 11,360,000

Computation of personal income tax

₦
First N 300,000 @ 7% 21,000
Next N 300,000 @ 11% 33,000
Next N 500,000 @ 15% 75,000
Next N 500,000 @ 19% 95,000
Next N 1,600,000 @ 21% 336,000
Next N 8,160,000 @ 24% 1,958,400
Tax liability 2,518,400
Less: WHT earlier deducted from
rent (10% x N 800,000) (80,000)
Tax payable (net) 2,438,400

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