June 28, 2025

Tax Reform Success in Nigeria: Your Ultimate Guide

by Ekosolicitors

INTRODUCTION:

On 26^th June, 2025, President Bola Ahmed Tinubu signed four major new Tax reform bills into law. Reshaping how taxes work for individuals and businesses across Nigeria. However, this new law would officially take effect in 2026. This article provides a professional and detailed analysis of the key provisions and their implications for individuals and corporations. The changes are

Tax Relief for Low-Income Earners

The new legislation offers substantial relief to low-income earners. As a result, It raises the tax-exempt threshold for personal income from ₦300,000 to ₦800,000 per annum. This move significantly advances a more progressive tax system by shielding a larger segment of the population from tax liabilities and increasing their disposable income. Additionally, the Act preserves the tax-exempt status of essential goods and services—such as food, medicine, and educational services—ensuring that the average Nigerian does not face an undue rise in the cost of living.

With this tax reform, the government is offering some breathing room to lower income earners

Increased Threshold for Small and Medium Enterprises (SMEs)

In a major boost for the SME sector, the new legislation expands the definition of a “small company.” Specifically, it increases the annual turnover threshold from ₦25 million to ₦100 million and sets a fixed asset cap at ₦250 million. Consequently, companies that meet this new classification now enjoy exemptions from Companies Income Tax, Capital Gains Tax, and the new Development Levy. Ultimately, this provision aims to stimulate growth, encourage entrepreneurship, and ease the tax compliance burden on a vital segment of the economy. Furthermore, it signals a more supportive regulatory environment for small businesses.

Increased Capital Gains Tax rate

The Capital Gain Tax rate for companies has been increased from 10% to 30% aligning it with the Companies Income Tax rate. For individuals, the CGT rate will be based on their personal income tax band, which ranges from 0% to 25%.

A more progressive Corporate Tax regime

The Companies Income Tax (CIT) for medium and large companies will be reduced from 30% to 25% starting in 2026. This reduction is intended to enhance Nigeria’s competitiveness as an investment destination.

New Value Added Tax (VAT) Revenue Sharing Formula

The new tax reform introduces a new formula for the distribution of (VAT) revenue among federal and state governments. The new formula allocates 30% of the VAT generated in a state to the state of origin, 50% is shared equally among all states, and 20% is allocated based on population size. This new formula is designed to incentivize states to foster economic growth and improve their local tax base.

Zero rate VAT on essential goods and services:

The new Act also updates what Nigerians will not be paying Value Added Tax on. The act levies zero VAT rate on basic items such as basic food items, hospital bills, tuition fees, electricity bills, educational materials, baby products. The implication of this is that, businesses selling these items can recover their VAT costs.

Simplification of Levies

The new tax reform, importantly, simplifies corporate levies significantly. Specifically, it consolidates multiple levies—such as the Tertiary Education Tax (TET), Information Technology Levy, National Agency for Science and Engineering Infrastructure (NASENI) levy, and Police Trust Fund levy—into a single Development Levy. Under this new structure, companies must now pay a 4% Development Levy on their assessable profits. Consequently, this rationalization reduces the administrative burden on businesses and provides a more predictable cost structure.

Rebranding and Reforming the Revenue Service

The Federal Inland Revenue Service (FIRS) has rebranded as the Nigeria Revenue Service (NRS), reflecting a broader mandate. The NRS now collects taxes as well as non-oil and oil revenues for the federation, aiming to boost efficiency and reduce revenue leakages. By consolidating revenue-generating functions under one authority, the government takes a major step toward strengthening fiscal governance.

A more progressive Personal Income Tax system

The new Act introduces a tax band for high-net-worth individuals. It subjects those earning over ₦50 million annually to a flat tax rate of 25%. This reduced rate, down from the previous top rate, aims to encourage tax compliance among high earners and boost overall government revenue as part of the broader tax reform.

A Unified Legal Framework

A cornerstone of the new tax reform is the consolidation of various tax laws into a single, cohesive document. Previously, Nigeria’s tax system was governed by a fragmented collection of statutes, often leading to jurisdictional conflicts and administrative complexities. The new tax reform harmonizes provisions from disparate acts, including the Finance Act, Companies Income Tax Act, and Petroleum Profits Tax Act, into a single, unified legal framework. This consolidation promises to reduce compliance burdens, minimize ambiguities, and provide a clearer roadmap for taxpayers.

Introduction of the Tax Ombuds office

The acts establish the Tax Ombuds office to act as a liaison between taxpayers and tax authorities. Providing independent review and resolution of complaints regarding taxes, duties, levies, and other regulatory matters

Controlled Foreign Company Rules

The Act taxes undistributed profits of foreign companies controlled by Nigerian entities if they can pay dividends without harming business operations.

Development Levy Introduced

Nigerian companies, excluding small ones, will be subject to a 4% Development Levy on assessable profits. This levy consolidates existing charges including: Tertiary Education Tax (TET), Information Technology Levy, National Agency for Science and Engineering Infrastructure (NASENI) levy, and Police Trust Fund levy

Increment in Penalties for Non- Compliance

Notably, the Act increases the penalty for failing to file tax returns to ₦100,000 in the first month and ₦50,000 for each subsequent month of non-compliance. In addition, it imposes a ₦5,000,000 penalty on anyone who awards contracts to individuals or companies not registered for tax. As a result, the legislation emphasizes stricter enforcement and accountability. Ultimately, these measures aim to strengthen tax compliance across both the public and private sectors..

Remote Workers and Freelancers

Under the tax reform, a remote Nigerian worker earning $2,000–$5,000 from a foreign client or employer must register with their state tax authority, declare their foreign income in Naira, and pay personal income tax like every other taxpayer.

WHAT TO DO NEXT

Furthermore, whether you’re a corporate entity, business owner, employee, or freelancer, this is the time to:

Review your income structure
Understand your tax obligations
Register with the appropriate tax authorities
Update compliance processes
Stay updated
Get professional advice.

CONCLUSION

Indeed, the new Tax Reform Act represents a bold and ambitious step toward modernizing Nigeria’s fiscal architecture. Through measures such as simplifying the tax code, reforming the revenue service, and providing targeted reliefs for SMEs and low-income earners, the government aims to create a more equitable and efficient tax system. However, the ultimate success of these tax reforms will depend on the effectiveness of the Nigeria Revenue Service in implementing the new provisions and fostering a culture of voluntary compliance. In this regard, sustained institutional capacity and accountability will be crucial.

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