On January 1 2020, the Finance Act 2020, a collection of amended tax and fiscal laws, took effect and further regulates individuals, private and public firms, as well as state and national institutions.
The Act made substantial amendments to the Companies Income Tax Act (CITA), Value Added Tax Act (VAT Act), Petroleum Profits Tax Act (PPTA), Personal Income Tax Act (PITA), Capital Gains Tax Act (CGTA), Customs and Excise Tariff (Consolidation) Act (CET Act), and the Stamp Duties Act (Stamp Duties Act).
It also clarifies previous grey areas such as possible non-taxation, double taxation and introduced an income exemption category.
This said, employees, human resources (HR) practitioners and employers should note below the implications of this law for their organisations and specifically financing:
1. All minimum wage earners will no longer pay tax!
Good news, right?
The law has exempted any employee who earns N30,000 or below from paying personal income tax. This is a huge relief to the lowest earners in the country. Meanwhile, all other income earners will be subjected to the full Personal Income Tax Act (PITA) tax provisions and .
NOTE: See Paragraph 33 of the PITA.
2. You will now pay more tax
This is how:
Prior to the enactment of the Finance Act 2020, 20% of your Gross Income, National Housing Fund (NHF) and your pension contribution are deducted before it (your gross income) is taxed.
In simple terms: Gross Income — (20% + NHF + Pension Contribution) = Taxable Income
For instance, if:
Gross Income N100,000
NHF N5000
Pension Contribution N5000
Your taxable income will be:
N100,000 — (20% + N5000 + N5000)
= N100,000 — (N30,000)
Taxable Income = N70,000
What has changed?
In the new law, tax exempt items (your pension contribution, NHF) will first be deducted from gross salary or income before computing your 20% (relief allowance).
Using same figures, taxable income will be:
N100,000 — (N5000 + N5000)
= N100,000 — (N10,000)
20% Relief Allowance = N90,000 x 20%
= N18,000
Tax Exempt Income = N18,000 + N10,000
= N28,000
Taxable income = N100,000 — N28,000
= N72,000
This shows that your tax exempt is lower and taxable income, higher. The reduction would then result in higher tax and lower disposable income. Employers need to update their payroll templates or applications to ensure compliance.
NOTE: Read Section 33 subsection 2 of the Finance Act 2020.
3. It affects your Post-employment Savings/Insurance or Investment Plan
Life assurance or annuity plans from the immediate previous year are now allowed as retrospective deductions from your taxable pay.
This means that tax relief on life assurance only applies for the previous year. Also, note that the contribution must be recognised by the Pension Reform Act 2014, in line with provisions in Finance Acts 2019 and 2020, Section 20 (1g) of PITA. We can then say that having a life insurance plan is a legal way to reduce your tax.
NOTE: See more in the re-introduced section 33 subsection 3.
4. Your Compensation after Losing or Leaving your Job is also Affected
Now, you don’t have to worry about the tax man.
According to the new law, if you lose your job or you leave your job, and your compensation is exactly N10million or below, no tax!
But if you are paid more than N10million, you will be taxed on the excess only. The law goes further to state that taxes would be payable by the 10th day of the next month and would require reporting during annual tax filing.
NOTE: This is an amendment to section 36 subsection 2 of the Capital Gains Tax Act (CGTA).
These are some summary information on the new Financial Act 2020 and how it might affect you. As an employee, you can ask your HR to explain further and as an employer, speak to your tax consultants to explain the implications to your staff.
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