Nigeria: FG Implements 2024 Withholding Tax Regulations to Modernize Tax System

The Federal Government has officially commenced the implementation of the 2024 Withholding Tax Regulations, marking a significant step towards modernizing Nigeria’s tax framework.

Approved by President Bola Tinubu in July 2024 and gazetted in October, these regulations took effect on January 1, 2025. Formally titled the “Deduction of Tax at Source (Withholding) Regulations, 2024,” the policy aims to streamline compliance, reduce inefficiencies, and ease the tax burden for businesses, particularly Small and Medium Enterprises (SMEs), manufacturers, producers, and farmers—sectors critical to Nigeria’s economic growth.

Key Features of the New Regulations

The Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, Taiwo Oyedele, highlighted the transformative elements of the updated regulations on social media.

1. Exemption for SMEs: SMEs are now exempt from withholding tax compliance, reducing administrative challenges and financial strain to foster growth and innovation.
2. Reduced Tax Rates for Low-Margin Businesses: Businesses with slim profit margins will benefit from reduced withholding tax rates, enhancing cash flow and operational efficiency.
3. Support for Key Sectors: Manufacturers, producers, and farmers are exempted from withholding tax obligations, strengthening these sectors to ensure sustainability and growth.
4. Simplified Tax Credit Utilization: The reforms make it easier for businesses to obtain credits for taxes deducted at source, addressing longstanding inefficiencies in the process.
5. Enhanced Transparency: By eliminating ambiguities in timing and definitions related to tax deductions, the updated regulations promote transparency and reduce opportunities for tax evasion.

Addressing Sector-Specific Challenges

The reforms aim to alleviate the tax burden on the manufacturing sector and small businesses, as disclosed by the Minister of Finance and Coordinating Minister of the Economy, Wale Edun, who signed the regulations into law. The policy simplifies tax deductions for payments under the Capital Gains Tax Act, Companies Income Tax Act, Petroleum Profits Tax Act, and Personal Income Tax Act.

Oyedele also elaborated on the need to reform Nigeria’s tax system to address fiscal inequities. He revealed that the highest-earning Nigerians could face over N1 million in monthly Pay-As-You-Earn (PAYE) taxes under proposed bills aimed at creating a progressive tax structure.

Proposed Tax Adjustments

1. Higher Tax-Free Threshold: The tax-free threshold has been raised to N800,000 annually (N67,000 monthly) from N300,000, providing relief to low-income earners.
2. Rent Relief: Individuals earning up to N1 million annually (N83,000 monthly) will enjoy rent relief of up to N200,000, exempting them from PAYE taxes.
3. Reduced Burden on Low and Middle-Income Earners: Over 90% of public and private sector workers are expected to pay less in taxes under the proposed system.
4. Increased Tax for High Earners: High-income earners will face a top tax rate of 25% for incomes exceeding N50 million annually.

For example, individuals earning N5 million monthly would pay approximately N1.07 million in PAYE taxes, reflecting a 21.5% effective tax rate, compared to the current 18.6%. Conversely, those earning N250,000 monthly will see their tax rate drop from 11.7% to 10%.

Simplified Tax Structure

The reforms integrate existing reliefs, such as the Consolidated Relief Allowance, into tax brackets, making calculations more straightforward for taxpayers. Statutory deductions like contributions to the National Housing Fund, National Health Insurance Scheme, and pensions remain unchanged.

Oyedele emphasized that the changes aim to simplify the system, reduce the tax burden for most Nigerians, and ensure high-income earners contribute their fair share. By addressing disparities between personal and corporate tax regimes, the Federal Government hopes to create a fairer, more efficient tax system that benefits businesses and individuals alike.

The implementation of the 2024 Withholding Tax Regulations and proposed reforms underline Nigeria’s commitment to enhancing fiscal sustainability and promoting economic growth.