Finance Act, 2020 introduces the following changes to the Personal Income Tax Act (PITA) and the Capital Gains Tax Act (CGTA):
1. Definition of Gross Income
Section 33(2) of PITA
“gross income” means income from all sources less all non-taxable income, income on which no further tax is payable, tax-exempt items listed in paragraph (2) of the sixth schedule and all allowable business expenses and capital allowances.”
Sixth Schedule (2)
(2) Tax Exempt: The following deductions are tax exempt—
(a) National Housing Fund Contribution, (b) National Health Insurance Scheme (c) Life Assurance Premium (d) National Pension Scheme (e) Gratuities
On the payroll, gross income is the basis for calculating the Consolidated Relief Allowance (CRA) and the 1% minimum tax. The new definition means that the gross income = taxable income less deductions specifically mentioned in paragraph 2 of the Sixth Schedule.
Click here for the PAYE tax calculator for ease of reference.
2. Exemption of minimum wage earners
Section 37 and para 33 of the Third Schedule of PITA
Any persons earning the national minimum wage or less from any employment is exempt from Personal Income Tax.
Employees who do not earn more than the National Minimum Wage (currently N30,000) are no longer liable to tax or deduction of monthly PAYE.
3. Pension contributions
Section 20(1g) of PITA
Tax relief(deduction) for pension contributions is limited only to schemes, provident or retirement benefits fund that are recognised under the Pension Reform Act (PRA) 2014.
This means that individuals who contribute to foreign schemes will not be able to claim a deduction in Nigeria for such contributions.
4.Life assurance deduction
Section 33(3) of PITA
This amendment reinstates the relief by way of deduction for the premium paid by an individual to an insurance company in respect of insurance for his life or that of his spouse or contract of deferred annuity for his own life or that of his spouse in the preceding year of assessment.
Individuals can now continue to claim tax reliefs on premium payments on their life assurance or that of their spouse.
5. Tax exemption for compensation for exemption for loss of employment
Section 36(2) of CGTA
Sums obtained by way of compensation for loss of office, up to a maximum of N10 000 000, shall not be chargeable gains subject to tax under this Act. Provided that any sum in excess of N10 000 000 shall not be so exempt but the excess amount shall be chargeable gains and subject to tax accordingly.
Sections 36(3) &(4) further state that any person who pays compensation for loss of office to individual is required, at the point of payment of such compensation, to deduct and remit tax to the relevant tax authority in line with the Pay As You Earn (PAYE) Regulation.
In summary; compensation for loss of office up to N10 000 000 exempted from capital gains tax. However, any excess above N10m is taxable at the GCT rate of 10%.
Tax files for some of these changes will be made available in the March update - Release 5.6a