How To Calculate Withholding Tax In Nigeria

Introduction

Calculating withholding tax (WHT) in Nigeria might seem like a complicated task, but it’s essential for businesses, individuals, and anyone earning income to understand it.

WHT is a crucial part of Nigeria’s tax system—it ensures that taxes are collected at the source and remitted to the government.

This article breaks down what withholding tax is, why it matters, and how you can calculate it in Nigeria without stress. I’ll also answer common questions people have about WHT to make everything clearer.

What is Withholding Tax?

Withholding tax is a method of collecting tax at the point where income is generated. Instead of waiting for individuals or businesses to pay their taxes at the end of the year, the government mandates that a percentage of certain payments be deducted upfront.

This deduction is then remitted to the Federal Inland Revenue Service (FIRS) or the relevant State Internal Revenue Service (SIRS).

For instance, if a company pays you for a service, they may deduct a portion of the payment as WHT and remit it directly to the tax authorities. This serves as an advance payment of your income tax.

Why is Withholding Tax Important?

Ensures Compliance: WHT helps the government ensure that taxes are collected consistently and on time.
Reduces Tax Evasion: By collecting tax at the source, it minimizes the chances of income earners avoiding tax payments.
Streamlines the Process: For individuals and businesses, it simplifies tax payments since a portion of their tax liability is already settled.

What Payments Attract Withholding Tax?

In Nigeria, WHT is deducted from specific types of payments, including:

Contracts and Consultancy Fees: Payments for services like consulting, construction, or IT work.
Dividends: Payments made to shareholders as returns on investments.
Interest: Income earned from investments such as fixed deposits.
Rents: Payments for using property, equipment, or space.
Royalties: Payments for intellectual property usage like copyrights or trademarks.

Each category has a specific withholding tax rate, depending on whether the beneficiary is a company or an individual and whether they are resident or non-resident in Nigeria.

Withholding Tax Rates in Nigeria

Here’s a simple breakdown of WHT rates:

Payment Type	Corporate Rate	Individual Rate
Dividends	10%	10%
Interest	10%	10%
Royalties	10%	5%
Rent (Property/Equipment)	10%	10%
Contracts	5%	5%
Consultancy/Professional Services	10%	5%

How To Calculate Withholding Tax in Nigeria

The formula is pretty straightforward:

WHT = Payment Amount × WHT Rate

Here’s a quick example:

Imagine you’re an individual consultant who just completed a project worth ₦1,000,000 for a company. The WHT rate for consultancy services for individuals is 5%.

WHT = ₦1,000,000 × 5%
WHT = ₦50,000

The company will deduct ₦50,000 from your payment and remit it to the tax authorities. You’ll receive ₦950,000 instead of the full ₦1,000,000.

This ₦50,000 can then be used to offset your income tax when you file your tax returns.

How to File and Remit Withholding Tax

If you’re the one deducting WHT (e.g., a company paying a contractor):

Deduct the Correct Amount: Use the applicable rate based on the type of payment.
Remit to the Tax Authorities: Submit the deducted tax to FIRS or SIRS within 21 days for companies or 30 days for individuals.
Issue a WHT Credit Note: Provide the beneficiary with a credit note showing the amount deducted and remitted.

For individuals receiving payments:

Keep track of all WHT deductions using the credit notes issued to you. These will be used when filing your income tax returns to claim a refund or reduce your tax liability.

Common Challenges

Incorrect Deductions: Ensure the correct rate is applied based on the type of payment and the recipient.
Late Remittance: Penalties apply for not remitting WHT on time.
Missing Credit Notes: Without these, it’s difficult to claim refunds or offset your tax liability.

Frequently Asked Questions

1. What happens if WHT is not deducted?

The company or individual responsible for deducting WHT may face penalties for non-compliance, including fines or legal action.

2. Can WHT be refunded?

Yes, if the total WHT deducted exceeds your tax liability, you can apply for a refund or carry it forward to offset future taxes.

3. Are there exemptions to WHT?

Certain organizations, like those with pioneer status, may be exempt from WHT. Always check with the tax authorities to confirm eligibility.

4. How do I get a WHT credit note?

The company or payer deducting WHT must issue the credit note. If they don’t, follow up to ensure it’s provided.

Conclusion

Withholding tax might sound complicated at first, but it’s a simple process once you break it down. It’s a system designed to keep taxes flowing smoothly and to help you, as a taxpayer, meet your obligations in advance. Knowing the rates, calculations, and processes can make managing WHT a lot easier.

Have you ever faced challenges with withholding tax calculations or remittances in Nigeria? Share your experience or questions below—I’d love to help!