Proposed income tax bill; Here is how much tax you might pay from your salary

The bill seeks to eliminate the Consolidated Relief Allowance (CRA) and introduce a 25% tax rate for individuals whose annual earnings exceed N50 million.

It also outlines allowable deductions under Section 28, which enable taxpayers to reduce their taxable income.

Under the previous system, salary earners were allowed to deduct certain allowances before calculating their personal income tax. The first of these was the Consolidated Relief Allowance (CRA).

Based on the current Pay-As-You-Earn (PAYE) system, someone earning N6 million annually would pay about N896,000 in taxes.

The current system uses a graduated tax scale 

Under the proposed tax system, the committee aims to simplify the process by eliminating the N200,000 plus 20% CRA formula.

However, the statutory allowances from the current system are retained, with an additional rent allowance of N200,000 or 20% of your rent (whichever is lower).

For simplicity, we’ll ignore the statutory and rent allowances in this calculation.

Using the same gross annual salary of N6 million, the tax payable under the proposed system would be N870,000, slightly lower than under the current system. The key difference is in how the graduated scale is applied:

For someone earning N6 million annually, the first N800,000 would be tax-free, leaving N5.2 million to be taxed. The next N2.2 million would be taxed at 15%, leaving N3 million, which would be taxed at 18%.

Our analysis shows that the proposed tax system would result in lower taxes for Nigerians who earn less than N1,450,000 monthly (assuming statutory allowances are not deducted). However, those earning above this amount are likely to pay more.

See the table below for likely taxes for different salary ranges.