#BounceMasterclass: How To Reduce Your Tax Burden (1)
Mr. Segun Ahmed Obi works for a construction company in Lagos. His annual gross income is 2 million naira. How much tax should Segun pay?
There is no one-size-fits-all approach to determine how much tax Segun should pay.
As far as the Personal Income Tax Act goes, there are some general principles that when applied give a general idea on how much tax Segun should pay.
But more importantly, there are also some steps Segun can take to reduce his tax burden without contravening the provisions of the law.
Those steps are the focus of this week’s edition of Bounce Masterclass.
According to Bounce Masterclass guest of the week, Goodluck Ikporo, a financial analyst, tax expert and a business manager, Segun can have his tax reduced through the general tax reliefs that applies to every tax payer earning above 300,000 naira per annum.
The tax reliefs under the new tax regime is known as the Consolidated Reliefs Allowance, CRA and makes provision for allowable deductions of 200,000 or 1% of gross income, whichever is higher.
So, in the case of Segun, 200,000 naira is higher and he will now get that as a statutory deduction before other considerations of allowable deductions to arrive at taxable income.
The law also allows for 20% deduction of his gross income. So Segun will get 20% off his 2-million-naira gross income in the process leading up to a decisive taxable income.
But that is about the CRA. There are other allowable deductions before taxation kicks in. These include the Contributory Pension Scheme of 8% and 2.5% contribution to the National Housing Fund.
By this time, the income should be taxed.
However, if Segun is smart enough and understands what needs to be done, he may still be able to keep the taxman at bay yet.
Such avenues include the following:
1. Health Insurance: If Segun is contributing to the national health insurance scheme, all medicals paid by Segun will also be applied as tax allowable expenses. So, all Segun’s medical expenses will be deducted from his gross income before applying the tax.
2. Life Assurance: Let’s say in 2016, Segun paid 10% of his annual income as premium on his life assurance policy. The 10% comes to 200,000 naira. That means, he also gets 200,000 deducted from his annual income before the tax applies.
However, this is not absolute. Segun must approach his employer with receipts and certificates from the insurance company showing that he paid a premium of 200,000 naira in the preceding year. Segun cannot enjoy the benefit of premium paid for 2017 in 2017.
3. Voluntary Pension Contribution: The statutory rate for pension is 8% for employees and 10% for the employer. Some people want to contribute more to their pension.
So, let’s say Segun belongs to this group and decides to save 190,000 naira as personal voluntary pension contribution.
This amount will also be deducted from Segun’s annual income before the tax applies. However, there is a law that states that should Segun decide to cash this money before the end of 5 years, it would be taxed.
Please note that for each of these items, there are rules and exemptions guiding them which shall be discussed in the next edition of Bounce Masterclass.
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