New tax law introduces rent relief capped at N500k for Nigerians

The federal government has abolished the longstanding consolidated relief allowance and personal relief for individuals under Nigeria’s personal income tax system, replacing it with a rent-based deduction mechanism as contained in the newly enacted Tax Act.

According to the Act, the total income of an individual for any year of assessment is to be computed as “the taxable income less total deduction”.

Under the new provisions, taxable income includes “assessable profits from trade, business, profession or vocation, employment income, investment income, profits or income from any other source, and chargeable gains from the disposal of chargeable assets”.

Consolidated relief for computing the old tax is N200,000 or 1 percent of gross income, whichever is higher, plus personal relief of 20 percent of gross income.

In their place, individuals can claim rent relief equivalent to 20 percent of the annual rent paid, capped at N500,000, whichever is lower.

“Rent relief of 20% of annual rent paid, subject to a maximum of N500,000, whichever is lower, provided that the individual accurately declares the actual amount of rent paid and other relevant information as may be prescribed by the relevant tax authority,” the Act reads.

The relief is limited to tenants, as the Act makes no provision for homeowners.

‘RENT RELIEF TO FAVOUR LOW-INCOME EARNERS MORE’

Speaking to TheCable, John Nwokolo, a tax expert, said the rent relief is structured to favour low-income earners, while high-income earners will pay more tax.

“The consolidated relief allowance will no longer be available for individuals in the new tax act,” Nwokolo said.

“In the case of which is better between the new PAYE tax and the old, that is dicey because in this case of the new rates, those who are earning less than N25 million per annum will tend to enjoy lesser taxes, while those earning N25 million and above will tend to pay higher taxes.

“The way the act is structured, it’s structured for people earning high income to pay more taxes.

“So the rent relief is whichever is lower between 20% of your rent and N500,000. So if your rent is 1,500,000, your rent relief would be 300,000 (20% of 1.5m) because it is lower than the 500k limit.

“If your rent is 3m, your relief will be the N500k because 20% of N3m is 600k, which is higher than the 500k limit.

“So, but then the percentage difference, it won’t be that much for those guys who are earning higher. It’s just that no matter what, they will tend to pay higher than what they would be paying using this current (old) tax rate.”

With the new tax law, an individual earning N6 million annually and paying N1 million rent yearly will get a relief of N200,000 (20 percent of N1 million), leaving the taxpayer with N5.8 million as taxable income, and an annual tax of N834,000.

In contrast, the old law offers a consolidated relief allowance of N200,000 and 20 percent personal relief, which is N1.2 million, leaving the taxpayer with taxable income of N4.6 million and an annual tax of N896,000.

This represents a reduction of N62,000 in annual tax and an additional N5,166 to the monthly take-home pay.

Other eligible deductions still recognised under the new law include contributions to the National Housing Fund (NHF), National Health Insurance Scheme (NHIS), and Pension Reform Act, as well as life insurance premiums, deferred annuities, and interest on loans for developing an owner-occupied residence.

Also, under Section 4 of the Tax Act, the first N800,000 of an individual’s annual income is now tax-free.