Legally reducing taxes is possible through proper tax planning, utilizing available tax reliefs, and structuring finances efficiently. This article provides a detailed guide on how to reduce tax legally in Nigeria while remaining compliant with the Federal Inland Revenue Service (FIRS) and State Internal Revenue Services (SIRS).
- Understand and Utilize Available Tax Reliefs
The Nigerian tax system provides various tax reliefs, deductions, and allowances that can help individuals and businesses reduce taxable income.
1.1. Personal Income Tax Reliefs
Individuals can take advantage of the following reliefs when filing their Personal Income Tax (PIT):
✔ Consolidated Relief Allowance (CRA): 20% of gross income plus an additional ₦200,000
✔ National Housing Fund (NHF) Contribution: Up to 2.5% of basic salary
✔ Pension Contribution: Contributions to approved pension schemes are tax-exempt
✔ Life Insurance Premium: Premiums paid for life insurance policies are deductible
✔ Gratuities and Retirement Benefits: Tax-free if paid under a recognized scheme
1.2. Business Tax Deductions and Incentives
Businesses registered in Nigeria can legally reduce their taxes by taking advantage of:
✔ Capital Allowances: Businesses can deduct capital allowances for assets used in operations
✔ Tax Holidays (Pioneer Status): Qualifying businesses can enjoy tax exemption for up to 5 years
✔ Export Incentives: Companies in export processing zones (EPZs) may qualify for tax waivers
✔ Loss Carry Forward: Businesses can carry forward losses for up to four years to offset taxable income
- Choose the Right Business Structure
The type of business structure you choose affects how much tax you pay. Businesses can be registered as:
✔ Business Name (Sole Proprietorship/Partnership) – Subject to Personal Income Tax (PIT)
✔ Limited Liability Company (LLC) – Pays Companies Income Tax (CIT) at 30% (or 20% for small businesses)
✔ Incorporated Trustees (NGOs/Charities) – May be exempt from taxation under certain conditions
👉 Tip: If your business qualifies, registering as a Small Company (turnover below ₦25 million) exempts you from paying the Companies Income Tax (CIT)
- Keep Proper Accounting Records and Claim Allowable Deductions
A well-organized accounting system ensures that all allowable expenses are properly documented to reduce taxable income.
3.1. Common Allowable Business Deductions
✔ Rent for Business Premises
✔ Salaries and Wages
✔ Utility Bills (Electricity, Internet, etc.)
✔ Repairs on Office Equipment
✔ Marketing and Advertising Expenses
✔ Loan Interest Paid for Business Operations
✔ Professional Fees (Legal and Accounting Services)
👉 Tip: Always keep receipts, invoices, and supporting documents to justify deductions in case of a tax audit.
- Take Advantage of Tax Exemptions and Rebates
Some income sources and investments are tax-exempt or enjoy reduced tax rates under Nigerian law.
4.1. Tax-Free Income Sources
✔ Dividends from Pioneer Companies – Tax-free under the Pioneer Status scheme
✔ Agricultural Income – Agricultural companies enjoy tax holidays for up to 5 years
✔ Capital Gains from Government Bonds – Investments in FGN Bonds, Treasury Bills, and Sukuk are tax-exempt
4.2. Small Business Tax Exemptions
✔ Businesses with a turnover below ₦25 million are exempt from VAT and CIT
✔ Startups in certain industries (agriculture, ICT, healthcare) may qualify for tax holidays
- Invest in Tax-Efficient Assets
Investing in tax-efficient assets and schemes can help reduce tax liabilities.
5.1. Invest in Government-Approved Bonds and Securities
✔ Income from FGN Bonds, Sukuk, and Treasury Bills is tax-exempt
✔ Capital gains from listed securities are exempt from Capital Gains Tax (CGT)
5.2. Set Up an Employee Pension Scheme
✔ Employer contributions to pension funds are tax-deductible
✔ Employees also enjoy tax reliefs on pension contributions
👉 Tip: Consider investing in mutual funds, real estate investment trusts (REITs), and insurance products that offer tax advantages.
- Take Advantage of Value Added Tax (VAT) Strategies
VAT is charged at 7.5% in Nigeria, but businesses can legally manage their VAT liabilities through the following:
6.1. Register for VAT to Claim Input VAT
Businesses that register for VAT can claim Input VAT on expenses, reducing the total VAT payable.
6.2. Structure Transactions Properly
✔ Ensure that VAT is charged only on taxable goods and services
✔ Some goods (e.g., basic food items, medical supplies) are VAT-exempt
👉 Tip: Businesses with annual turnover below ₦25 million are exempt from VAT registration.
- File Tax Returns on Time to Avoid Penalties
Filing taxes late attracts penalties and interest, increasing tax liabilities unnecessarily.
7.1. Tax Filing Deadlines in Nigeria
✔ Companies Income Tax (CIT): Due within six months after the financial year-end
✔ Personal Income Tax (PIT): Due by March 31st of every year
✔ Value Added Tax (VAT): Due by the 21st of the following month
👉 Tip: Use tax professionals or accounting software to ensure timely and accurate tax filings.
- Leverage Tax Treaties and Double Taxation Agreements
Nigeria has Double Taxation Agreements (DTAs) with several countries, preventing businesses from being taxed twice on the same income.
✔ DTAs exist with the UK, China, Canada, France, South Africa, and other countries
✔ Businesses operating internationally can claim tax credits on foreign income
👉 Tip: If you do business internationally, consult a tax expert to leverage DTAs for tax savings.
Conclusion
Legally reducing taxes in Nigeria is possible through effective tax planning, maximizing reliefs, and structuring financial transactions wisely. Businesses and individuals must stay compliant with tax laws while using available incentives to minimize tax burdens.
By following these strategies, you can reduce tax liabilities, improve cash flow, and avoid penalties from tax authorities. If you need professional tax advice, consider consulting an expert to ensure compliance while optimizing tax savings.
Need help with tax planning and compliance? Contact a professional tax consultant today for expert guidance on reducing your taxes legally!
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