Understanding Nigeria's Progressive Tax System

A Complete Beginner's Guide

Last Updated: January 2025 | Based on Nigeria Tax Act (NTA) 2025

15 min read

What is a Progressive Tax System?

Nigeria uses a progressive tax system. This means the government doesn't take the same percentage of tax from everyone. Instead, your income is divided into different portions (we'll call them "buckets"), and each bucket is taxed at a different rate.

The key point: You DON'T pay one flat percentage on all your money. Different parts of your income are taxed differently!

Think of it like buying items at different prices. The first item costs ₦0 (free!), the second item costs 15%, the third costs 18%, and so on.

The 6 Tax Buckets (According to NTA 2025)

According to Section 58 of the Nigeria Tax Act (NTA) 2025, here are the official tax buckets:

Bucket	Annual Income Range	Bucket Size	Tax Rate
Bucket 1	₦0 - ₦800,000	₦800,000	0% (Tax-Free!)
Bucket 2	₦800,001 - ₦3,000,000	₦2,200,000	15%
Bucket 3	₦3,000,001 - ₦12,000,000	₦9,000,000	18%
Bucket 4	₦12,000,001 - ₦25,000,000	₦13,000,000	21%
Bucket 5	₦25,000,001 - ₦50,000,000	₦25,000,000	23%
Bucket 6	Above ₦50,000,000	Unlimited	25%

 What This Means: EVERYONE (whether you earn ₦1 million or ₦100 million per year) gets the first ₦800,000 completely tax-free
Only the money in each bucket gets taxed at that bucket's rate
You DON'T pay the highest rate on all your money!
 

Why This System is Better (The Benefits)

Benefit 1: Protects Low-Income Earners

The first ₦800,000 per year (about ₦66,667 per month) is tax-free for everyone. This means:

If you earn ₦50,000/month (₦600,000/year), you pay ZERO tax
Lower earners keep more of their money for basic needs

Benefit 2: Fair to Everyone

Higher earners pay more tax (in total amount)
But everyone pays the same rate on money in the same bucket
Someone earning ₦10 million still pays 0% on their first ₦800,000, just like someone earning ₦1 million

Benefit 3: Earning More Never Hurts You

If you get a raise, only the EXTRA money is taxed at a higher rate
Your old salary stays taxed the same way
You always take home more money when you earn more

Benefit 4: Predictable and Clear

The rates are fixed by law (NTA 2025, Section 58)
Everyone follows the same rules
No surprises or favoritism

Example 1: Sarah Earns ₦200,000 Per Month

Let's start with someone earning a modest salary.

Sarah is just starting out and earns ₦200,000 per month.

Step 1: Convert to Annual Income

Monthly Salary: ₦200,000
Annual Salary: ₦200,000 × 12 months = ₦2,400,000 per year

Sarah earns ₦2,400,000 annually. Now let's see how her income fills the buckets.

Step 2: Fill the Buckets with Her Income

BUCKET 1 (₦0 - ₦800,000) @ 0% tax rate
├─ Bucket size: ₦800,000
├─ Amount in this bucket: ₦800,000 (full bucket)
├─ Tax rate: 0%
└─ Tax on this bucket: ₦800,000 × 0% = ₦0

Remaining income: ₦2,400,000 - ₦800,000 = ₦1,600,000

BUCKET 2 (₦800,001 - ₦3,000,000) @ 15% tax rate
├─ Bucket size: ₦2,200,000
├─ Amount in this bucket: ₦1,600,000 (partial - this is all her remaining money)
├─ Tax rate: 15%
└─ Tax on this bucket: ₦1,600,000 × 15% = ₦240,000

Remaining income: ₦0 (she stops here)

BUCKET 3 and beyond: Not reached

Total income used: ₦800,000 + ₦1,600,000 = ₦2,400,000 ✓

Sarah's ₦2.4 million income fills Bucket 1 completely and part of Bucket 2. She doesn't reach Buckets 3, 4, 5, or 6.

Step 3: Calculate Total Tax

Tax from Bucket 1: ₦0
Tax from Bucket 2: ₦240,000
─────────────────────────────
Total Annual Tax:  ₦240,000

Sarah pays ₦240,000 in tax per year.

Step 4: Calculate Monthly Tax

Annual Tax: ₦240,000
Monthly Tax: ₦240,000 ÷ 12 months = ₦20,000 per month

Every month, ₦20,000 is deducted from Sarah's salary as tax.

Step 5: Calculate Take-Home Pay

MONTHLY:
Monthly Salary:    ₦200,000
Monthly Tax:       -₦20,000
─────────────────────────────
Monthly Take-Home: ₦180,000

ANNUALLY:
Annual Salary:     ₦2,400,000
Annual Tax:        -₦240,000
─────────────────────────────
Annual Take-Home:  ₦2,160,000

Sarah takes home ₦180,000 every month (₦2,160,000 per year).

Step 6: What's Her "Real" Tax Rate?

People might say "Sarah is in the 15% tax bracket" because her income reaches Bucket 2.

But she's NOT paying 15% on everything!

Effective Tax Rate = (Total Tax ÷ Total Income) × 100
                  = (₦240,000 ÷ ₦2,400,000) × 100
                  = 10%

Sarah's effective tax rate is 10%, not 15%!

Why? Because:

• The first ₦800,000 was taxed at 0%
• Only the remaining ₦1,600,000 was taxed at 15%

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