The Personal Income Tax (PIT) is the most common tax type in the country. Interestingly, many taxpayers don’t understand the way this tax is deducted and as a result, there are often questions about it.
In this post, you’ll learn everything you need to know about PIT because we’ve compiled a list of 12 commonly asked questions about this tax type and their answers.
#1 What is PIT?
The origin of the PIT can be traced to the Personal Income Tax Act No 30 of 1996.
Basically, PIT is deducted as a result of trade, business, profession, vocation for a period of time and applies to personal emoluments such as wages or salaries, gratuity, superannuation or pension schemes as well as any other income derived by reason of employment.
These include salary, wage, fee, allowance or other gain or profit from employment including compensations, bonuses, premiums or other benefits given by the employer to the employee whether temporary or permanent.
Also, it can be applied to the gain or profit arising from a right granted to anybody for the use or occupation of any property. It is also applicable to dividends, interest, discount, pension as well as annuity.
#2 What is the difference between PAYE and PIT
PAYE is a type of PIT. It is the acronym for Pay as You Earn. It is a model of collecting income tax from employees by deducting from their source which is their employer as stipulated in section 81 of the Personal Income Tax Act Cap P8 LFN 2011.
It is expected that the PAYE is remitted at the 10th day of the month following the deduction.
#3 What are the categories of people that should pay PIT?
The categories include:
- persons employed in the Nigerian Army, the Nigerian Navy, the Nigerian Air Force, the Nigerian Police Force other than in a civilian capacity;
- officers of the Nigerian Foreign Service;
- every resident of the Federal Republic of Nigeria who earns an income or profit from a business in Nigeria;
- anyone residing outside Nigeria who derives income or profit from Nigeria.
- itinerant workers; this category is often charged by the state in which they have worked for any given year
- communities; this occurs when it is impossible to assess each member of the community individually
- trustees of any settlements or estates according to the Second Schedule to this Act.
#4 What is the deductible rate of PIT?
If you earn N300,000 or less, the deductible rate is 7%. For the next N300,000 that you earn, the rate is 11%. Subsequently, the rate increases to 15% for the next N500,000 and if you earn an extra N500,000, the deductible rate is 19%. For income of N1,600,000 or greater, the rate falls between 21% and 24%.
#5 Where do I pay my tax if my state of residence is different from where I work?
This scenario is quite common in Nigeria. For instance, there are people working in Lagos and Abuja but living in Ogun and Nasarawa state respectively.
Well in this case, the tax should be remitted to your state of residence.
#6 Can I request for a refund if I think I have over-taxed?
Yes, you can. You just need to contact the Revenue Department in your state with evidence to buttress your claims.
#7 Are there allowances that are not tax deductible?
There are some allowances/schemes that are non-tax deductible. These include:
- a) National Housing Fund contributions b) National Health Insurance Scheme contributions c) Life Assurance Premium
- d) National Pension Scheme
- e) Gratuities
#8 What is Benefit-in-Kind (B.I.K)?
Benefit-In-Kind refers to benefits that come with your position in an organization. These include official car, official accommodation, cooks, gardeners, security etc.
Usually, the amount treated as B-I-K is added to his income in arriving at his/her gross/consolidated income that is assessed to tax.
#9 Do companies pay income tax?
In this case, the tax applies to the company’s profit as long as the firm is not in the process of being wound up or liquidated.
Additionally, the tax could be capital in nature and is equal to the nominal value of the bonus shares, debentures or securities that is awarded to the shareholder.
#10 How do individuals living outside Nigeria but doing business in Nigeria pay tax?
For businesses that are only partially carried out in Nigeria by an individual, an executor or a trustee, the gains or profit that can be attributed to Nigeria will not be taxed for the following reasons:
- the individual or the executor does not have a fixed base in Nigeria from which he carries out the business
- the individual does not habitually operate a trade or business through a person in Nigeria authorised to conclude contracts on his behalf or some other person or maintain a stock of goods in Nigeria from which deliveries are regularly made on his behalf;
- the trade or business in Nigeria does not involve a single contract for surveys, deliveries, installations or construction
#11 Does PIT apply to farmers?
Personal Income tax can also apply to agricultural profit. These include gain or profit from the use of the land for agricultural purposes or from livestock.
This income tax also applies to employment. It doesn’t matter if the employer is not based in the country. If you are curious, click the link for an instance where, the gain or profit from any employment exercised in Nigeria is derived from Nigeria even if the gains or profits from the employment may not be received in Nigeria.
#12 How does PIT apply Nigerian dividends or shares?
Usually, I have to check my pan status regularly to ensure that I have the right codes active. Then the income from a dividend distributed by a Nigerian company is tax deductible and this is calculated as the gross amount of that dividend prior to payment.
For individuals, this means that tax imposed on the profits of the companies is the income from a dividend accrued to the individual who is a shareholder in the company in proportion to his share in the ordinary capital at the relevant time.