The taxation of employees and sole traders is covered by ITMA and PITA. It falls under the personal income tax system of Nigeria. The collection of personal income tax is vested in the State Board of Internal Revenue (SBIR) of the principal place of residence of self – employed individual and principal place of business of employed individuals. Each SBIR is assisted by its operational arm- the State Internal Revenue Service (IRS), in carrying out its primary duties which include assessment and collection of taxes from individuals resident or working in a state.

This unit, therefore, exposes you to the Pay-As-You-Earn (PAYE) system, earned and unearned incomes of a sole proprietorship business with all associated deductions and non-deductible expenses. Reliefs and allowances will also be considered.


At the end of this unit, you should able to:

  1.  itemise personal incomes chargeable to tax in Nigeria 
  2. explain the meaning of earned and unearned incomes 
  3.  outline allowable and non-allowable deductions 
  4.  illustrate adjusted profits of a sole trader 
  5.  enumerate all available reliefs and allowances due to an individual 
  6.  discuss the Pay-As-You-Earn system. 


3.1 Personal Income Changeable to Tax

PITA section 2(1) contains some relevant provisions on personal income tax in Nigeria.

  1.  Self-employed individuals – the appropriate/relevant SBIR is determined by the principal place of residence of the individual on the 1st day of the year of assessment; and it remains unchanged till the end of the assessment year 
  2.  The taxpayer’s total global income derived within or outside Nigerian is liable to tax in Nigeria, irrespective of the source and whether or not it is brought into Nigeria. The assessment of the income is usually done on the preceding year basis. 

Income tax is payable on any income that has accrued in Nigeria from productive assets; derived from Nigeria from productive activities, brought into Nigeria in form of emoluments. Income tax is payable on income from sources within and outside Nigeria, in particular, but not restricted to the following.

  1. Profits or gains from a trade, business, profession or vocation;
  2. . Remuneration from an employment from both the public and private sectors. Remuneration covers salaries, wages, fees, allowances including compensations, commissions, bonuses, premiums, benefits or other perquisites allowed, given or granted by any person to an employee. 

However, remuneration does not include refund of out-of-pocket expenses, medical expenses, and cost of passages to and from Nigeria, sums received for up keep of a child which are all exempted from tax. Benefits, in kind, include the following.

  1. The use of a motor vehicle provided by an employer; 
  2.  Furniture and accommodation provided by an employer; 
  3. Services of domestic servants paid for by an employer; 
  4.  Free food provided by an employer; 
  5.  Cost of water and electricity consumption borne by employer. 

Benefits in kind are assessed to tax under the following rules.

  1. Where an asset belonging to an employer is made available for an employee’s use, the employee will be treated as receiving a taxable benefit equal to: i. 5% of the cost of the asset to the employer; or ii. where the cost cannot be ascertained, 5% of the market value of the asset at the date it was acquired by the employer; iii. where the employer rents or hires an asset, which is thereafter made available for employee’s use, the taxable benefit received by the employee is the annual cost of the rent or hire;iv. where living accommodation is provided for an employee or the employee’s spouse, he will be assessed to taxable benefit equal to the annual value for local rating purposes, less any rent refunded or otherwise suffered by the employee or his spouse. If the living accommodation is not assessed to local rates, then the tax authority of the territory in which the individual resides will determine the annual value to use; v. where an employee receives a benefit in kind in respect of free accommodation, which is considered as necessary for him to do his job properly or which his position demands, for example, hotel managers, housekeepers, night watchmen etc., the benefit in kind shall not be assessed to tax. The accommodation is regarded as a representative accommodation. 
  2. Gains or profits including any premiums arising from a right granted to any person for the use or occupation of any property; 
  3. Dividends, interests or discounts received;Any charge or annuity received;
  4.  Any balancing charge arising where a business person disposed off an asset used for the purpose of trade or business carried on by it at a profit; 

3.1.1 Earned and Unearned Incomes

In relation to an individual, earned income means income derived from a trade, business, profession, vocation or employment carried on by him and a pension derived by him in respect of any previous employment. Unearned income, on the other hand, represents rent, dividends, royalty, discounts, which may be received net of withholding tax. These are also known as investment incomes. Where they are received net of withholding tax, they are referred to as “Franked investment income”.

3.1.2 Determination of Profits or Gains

This is in relation to profits or gains arising from a trade, business, profession or vocation. There are different kinds of businesses- ranging from sole proprietorship, partnership to incorporated companies. In this section, we are concerned with the profits or gains made by an individual business person who engages in a trade, business, profession or vocation. PITA (1993) defines an “individual” to include a corporation, sole and a body of individuals; but does not include partnership, community, family, trustee or an executor. A “person” on the other hand is defined to include an executor, trustee, company, partnership, community, family and individual.

To determine the profits or gains arising from a sole proprietorship business, a computation of adjusted profit in respect of a defined period is carried out, by considering statutory total incomes and deducting all allowable deductions. For an individual who is engaged in an activity to be referred to as a sole proprietor or trader, he must be operating a legal and registered business which is not in contravention of the law in any way. Again, for a sole trader to be assessed to tax, he must have been in business for, at least, three years from the date of commencement.


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