Many taxpayers in Nigeria do not know that there exists tax reliefs put in place to reduce certain tax burdens they bear. In this article, we’ll be revealing those tax reliefs and the class of taxpayers who benefit from them. In addition, we’ll be providing explanations on how to calculate tax relief in Nigeria. Keep on reading to learn the legal way employees and companies can lessen their total tax liability in Nigeria. We’ll be discussing Consolidated Relief Allowance as a tax relief for taxpayers under the Personal Income Tax and Capital Allowance for taxpayers under the Companies Income Tax.
How to calculate tax relief in Nigeria would be discussed below:
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How to Calculate Consolidated Relief Allowance
Consolidated relief allowance is a tax relief allowed under the Personal Income Tax Act and is eligible to taxpayers who earn business income or employment income. They include employees, partners in a partnership, unincorporated trusts, joint ventures, families, and communities.
Consolidated relief allowance is calculated as Higher of N200,000 and 1% of gross income, plus 20% of gross income*.
For clarity, we need to point out that the “Gross income” above with an asterisk means income from all sources less all non-taxable income, income on which no further tax is payable. That is to say, all tax-exempt items, business allowances and capital allowances must first be deducted from the gross emoluments to arrive at the gross income.
The deductions allowed to be deducted from the gross emoluments of a taxpayer under the Personal Income Tax Act include the following:
- NHF contribution
- National Health Insurance Scheme
- Life Assurance Premium
- Pension Scheme and Gratuities
- Reimbursements
- Interest and dividend
- Disability allowance
Allowable business deductions include:
- Interest on money borrowed for business purposes.
- Rent and premium payable on land or buildings occupied for the purpose of acquiring the income.
- Repairs and maintenance expenses for premises, plant, or machinery used in generating income.
- Bad debts.
- Subscriptions, provided they relate to the business or profession.
Illustration on how to calculate consolidated relief allowance:
What would be the value of the consolidated relief allowance for Mr. John Bull, an architect whose annual gross emoluments for 2022 was N4,000,000? Let’s assume he’s entitled to a few allowable deductions that include National Housing Fund, National Health Insurance Scheme, and Pension.
Solution
Consolidated Relief allowance =Higher of N200,000 and 1% of gross income, plus 20% of gross income*
Remember “Gross income* (GI2)” means income from all sources less all non-taxable income, income on which no further tax is payable.
Annual Gross income (G1) = N4,000,000
Annual Gross income* (G2) = N4,000,000 – (Tax-exempt items contributions, i.e.NHIS+NHF+Pension)
NHF contribution = 2.5% of N4,000,000 = N100,000
NHIS contribution = 5% of N4,000,000 = N200,000
Pension contribution = 8% of N4,000,000 = N320,000
Total of tax-exempt contributions = N(100,000 + 200,000 + 320,000) = N620,000.
Therefore, Gross income* (GI2) = N4,000,000 – N620,000 = N3,380,000
CRA = N200,000 + 20% of N3,380,000 (we chose N200,000 because it is higher than N40,000 which is 1% of N4,000,000)
= N200,000 + N676,000
= N876,000
The tax relief due to Mr John Bull for 2022 is N876,000.
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How to Calculate Capital Allowance in Taxation in Nigeria
The Companies Income Tax Act grants capital allowance as a tax relief to businesses and companies in Nigeria for purchasing non-current assets used in generating taxable profits, in lieu of accounting depreciation. However, if these qualifying assets are utilised towards generating tax-exempt profits, the capital allowance will not be claimable. Also, capital allowance will be prorated if qualifying assets are partially used for generating taxable profits.
Before we proceed to provide the formula for calculating capital allowance, let’s briefly explain the types of capital allowances in Nigeria. Initial allowance and annual allowance are the two major capital allowances granted on non-current assets used in generating taxable profits, in lieu of accounting depreciation. Initial allowance is granted once in the first year of purchase and when the asset is first used to generate taxable profits. Annual allowance, on the other hand, is granted every year that the asset is used until it is fully written off.
An additional allowance under the Company Income Tax Act is the investment allowance which is granted at the rate of 10% of the cost of incurring expenditure on plant and equipment. Investment allowance is granted once.
Below is a table showing the qualifying expenditure for capital allowance and their respective applicable rates:
| Qualifying Expenditure | Initial Allowance (%) | Annual Allowance (%) |
| Building ( industrial & non-industrial) | 15 | 10 |
| Mining | 95 | NIL |
| Plant and machinery for Agricultural production | 95 | NIL |
| Plant and machinery for other purposes aside from agricultural production | 50 | 25 |
| Furniture & fittings | 25 | 20 |
| Motor vehicle for public transportation | 95 | NIL |
| Motor vehicle for other purposes aside from public transportation | 50 | 25 |
| Plantation equipment | 95 | NIL |
| Housing estate | 50 | 25 |
| Ranching and plantation | 30 | 50 |
| Research & Development | 95 | NIL |
A new addition to the above-mentioned qualifying expenditure list is the development or acquisition of software and capital outlays on electronic applications. But at the time of writing this piece, the rates for initial allowance and annual allowance are unspecified for software
Below are the formulae for determining initial allowance and annual allowance calculating capital allowance in taxation in Nigeria:
- Initial allowance (IA) =
Initial allowance rate × cost of the asset
- Annual allowance (AA) = Annual allowance rate × (Cost of the asset minus initial allowance).
Remember, investment allowance is calculated as 10% of the cost of acquiring plant and equipment for a business.
Another important information to note is that the maximum capital allowance that a taxpayer can claim is two-thirds of assessable profits. Only taxpayers in the agro-allied and manufacturing industries are exempted from this restriction.
Illustration 1
In January 2022, Prudent & Sons purchased plant and machinery for NGN15,000,000. The accounting year ends on December 2022. Calculate the capital allowance.
Solution:
According to the Companies Income Tax Act, the capital allowance rate for addition to plant and machinery are as follows:
10% – investment allowance
50% – initial allowance
25% – annual allowance
Investment allowance = NGN15,000,000 × 10% = NGN1,500,000
Initial allowance = NGN15,000,000 × 50% = NGN7,500,000
Annual allowance = NGN(15,000,000 – 7,500,000) × 25% = NGN1,875,000
Total capital allowance = NGN (1,500,000 + 7,500,000 + 1,875,000) = NGN10,875,000
Illustration 2
Carseal Logistics bought furniture and fittings for their Lagos office in April 2021 at the cost of N10,000,000. Accounting years ends on 31 December. Calculate the capital allowance.
Solution:
The capital allowance rates for addition to furniture and fittings are
25% – initial allowance
20% – annual allowance
Therefore:
Initial allowance (IA) = NGN 10,000,000 × 25% = NGN 2,500,000
Annual allowance (AA) = NGN (10,000,000 – 2,500,000) × (9 / 12) × 20% = NGN 1,125,000
Total capital allowance = NGN (2,500,000 + 1,125,000) = NGN 3,625,000