The recent proposed changes to Nigeria’s personal income tax regime as predicted by Taiwo Oyedele are designed to address fairness and complexity, with significant spillover effects on businesses. These are what these changes mean for organizations.
1. Improved Employee Retention and Satisfaction
A major benefit of the new tax system is that over 90% of workers, particularly those earning ₦1.7 million or less annually (₦140k per month or less), will pay less tax. With only 2.4% of Nigerians earning above ₦200k monthly (₦2.4 million annually), the majority (96%) will see a tax reduction. This means employees will take home more pay, which can lead to higher job satisfaction, reduced turnover, and improved morale, helping businesses lower recruitment costs and increase productivity.
However, businesses might face higher labor costs as they adjust salaries to stay competitive. Additionally, managing payroll and ensuring compliance with the new rules could create extra work for companies.
2. Encouragement for Formalisation
The reforms encourage businesses to formalise by narrowing the tax rate gap between businesses and companies. This makes formalisation more attractive, offering access to financing, partnerships, and regulatory compliance.
Conversely, the push for formalisation could increase operational costs, and the heightened enforcement means businesses will need to be more vigilant to avoid penalties.
3. Simplified Tax Calculations
The integration of reliefs, like the Consolidated Relief Allowance, directly into the tax table simplifies tax calculations. This makes it easier for businesses to deduct and remit accurate Pay-As-You-Earn (PAYE) taxes, reducing administrative burdens and reliance on tax consultants.
4. Impact on Compensation Structures
For businesses with high-income employees, the increased tax rates on top earners may require a reassessment of compensation packages. Employers might need to consider non-taxable benefits, such as pension contributions or housing, to remain competitive.
5. Cash Flow Considerations for SMEs
SMEs employing minimum wage earners will benefit from the N1m annual exemption threshold. This reduces payroll tax obligations, freeing up cash flow for reinvestment, but SMEs must track salaries accurately to maximise these benefits.
6. Increased Focus on Compliance
As the tax system becomes more straightforward, businesses will face heightened enforcement to ensure compliance. Regular review of payroll processes will help avoid penalties and maintain transparency.
