- Understandably, majority of income earned from “side hustles” in Nigeria escape taxation.
- Recently the government announced its intention to enforce the Personal Income Act which makes it mandatory for all earned income to be taxed.
- This article breaks down the taxation to be expected on alternative income sources and how it will be calculated
The Nigerian government currently boasts a paltry tax-to-GDP ratio of 10% – one of the lowest in the world. A tax-to-GDP ratio is the total amount of taxes collected per total value of goods produced in the country. A pertinent reason for this is the low rate of tax collection in the informal market, which is largely made up of sole entrepreneurs, freelancers and those with alternative sources of income.
Lately, the government has been very vocal about its plans to focus on this segment of the economy as part of its tax revenue drive. Just recently, the Minister for Finance, Kemi Adeosun revealed plans to go after “side hustles”, a term for alternative sources of income for employed Nigerians who engage in other personal businesses to augment their primary income.
This has resulted in a backlash as most Nigerians see side hustling as an honest and legitimate way of getting around harsh economic conditions. Nevertheless, we have decided to prepare this tax guide for the possible tax you may pay for the income earned from a side hustle. This is based on the Personal Income Tax Act (Amended 2012).
Common side hustles in Nigeria include running a taxi service (e.g. UBER), owning a thriving blog, running a barbershop, hairdressing salon or fashion boutique, being a make-up artiste, part-time musician or consultant, or engaging in trade of any kind.
If your side hustle falls into any of these categories of business, then you are expected to pay tax on the income earned.
Nigeria does not operate a flat tax rate, rather taxes are progressive. This means that the higher you are up the ladder, the more your taxes. Here is what it looks like:
- You pay a flat rate of 7% of your first N300k annual income or less
- You pay another 11% of your next N300k annual income or less
- You pay another 15% of your next N500k or less
- You pay another 19% of the next N500k you earn or less
- You pay another flat rate of 21% for your next N1,600,000
- You pay a final flat rate of 24% for any amount left off your income after deducting all of the above.
The following are likely taxes you are expected to pay based on your average income (after deducting all allowable expenses).
My Side Hustle makes;
An average income of N50k monthly
Maximum tax payable – N1,633 monthly
Taxation rate – 3.3%
Example of hustle – blogger, makeup artiste, trader, washer man, graphic artist, web administrator, social media strategist, lesson teacher, etc.
An average income of N100k monthly
Maximum tax payable – N 5,966.67 monthly
Taxation rate – 6%
Example of hustle – DJ, UBER driver, blogger, makeup artiste, trader, handyman, graphic artist, web administrator, social media handler, etc.
An average income of about N150k monthly
Maximum tax payable – N12,966.67 monthly
Taxation rate – 8.6%
Example of hustle – photographer, UBER partner, dry-cleaning service, editor, blogger, makeup artiste, trading, web administrator, graphic artist, social media influencer, etc.
An average income of N200k monthly
Maximum tax payable – N20,766.67 monthly
Taxation rate – 10.4%
Example of hustle – consultant, freelance writer, MC, photographer, UBER partner, dry-cleaning service, blogger, makeup artiste, trader, estate agent, personal trainer, etc.
An average income of N300k monthly
Maximum tax payable – N37,566.67 monthly
Taxation rate – 12.5%
Example of hustle – consultant, contractor, freelance writer, MC, photographer, UBER Partner, dry-cleaning service, blogging, makeup artiste, trading, personal trainer, etc.
An average income of N500k monthly
Maximum tax payable – N74,666.67 monthly
Taxation rate – 14.9%
Example of hustle – consultant, contractor, freelance writer, MC, photographer, UBER Partner, dry-cleaning service, blogger, makeup artiste, trader, caterer, etc.
In our opinion, any side hustle that earns you more than N500k per month is no longer a side hustle. You are better off giving that business more attention.
Allowable tax deductions
Just like a regular business, every side hustle incurs expenses, which are typically deducted from the income you make to determine what your taxable income (profit) is. However, not all expenses are allowed to be deducted before you arrive at your taxable income. The list of expenses that are tax-deductible and those that are not is provided at the end of this article.
Once you are done deducting and arrive at your gross income, you apply for a tax relief. A tax relief is the portion of your income from the side hustle that the government is not going to tax. Currently, the consolidated tax relief is derived by multiplying your annual income by 20% and adding N200,000 to the total.
For example, if your annual income from side hustle is N1 million, then your tax relief is 20% of N1m, which is N200k plus an additional N200k, giving you N400k.
The N1m income less the N400k tax relief becomes N600k, which is your taxable income. In other words, you will be paying tax on just N600k, while you keep N400k as tax-free pay.
For you to enjoy that tax relief, your annual income must be higher than N250k. This means you must earn at least, more than N20k monthly from your side hustle.
Being taxed on income from a side hustle might seem like a hassle however like any other form of taxation, it is a necessary evil. Nigerians must however learn to hold the government accountable for the expected dividends of any tax collected. As both parties better understand this contractual relationship, the society will further realize the benefits of taxation.
- Any interest on loan on your side hustle
- Rent paid, assuming you rent an office for your side hustle
- Rent you pay to your staff
- Legal Expenses that excludes cost of acquiring a lease, tax appeal or traffic offence
- Any other expense that is wholly, reasonably, exclusively and necessarily incurred for the sole purpose of running the business
- Any bad debt that you provide for or write-off
Expenses that are not allowable;
- Fines and Penalties
- Withdrawal of capital
- Any donations that you make
- Legal expenses for acquiring or renewing leases, defending tax or traffic offenses
- Any private or personal expenses
- Capital expenditure and depreciation.
If you earn N1,000,000 in income from side hustle and spend N200k on expenses that are allowable and another N200k on expenses that are not allowable, you will pay tax on N800k.
That is; N1,000,000 less N200,000.
Who you pay tax to? The State Inland Revenue Service of where you reside.
UPDATED: Nigeria received $5.85 billion capital inflows in Q1 2020 –NBS
Nigeria received $5.85 billion capital importation (inflows) in the first quarter (Q1) of 2020, compared to $8.51 billion in Q1 2019.
Nigeria received $5.85 billion capital importation (inflows) in the first quarter (Q1) of 2020, as against $8.51 billion in Q1 2019. This is according to the latest capital importation report released by the National Bureau of Statistics (NBS).
According to the NBS, the $5.85 billion worth of capital importation in Q1 2020 represents an increase of 53.97% when compared to how much was received in Q4 2019.
However, when compared to the corresponding first quarter period of 2019, the figure indicates a 31.19% decline.
Capital Inflow by type
In the first quarter of 2020, the largest amount of capital importation was received through portfolio investment, which accounted for 73.61% ($4.31 billion) of the total capital importation.
Under the portfolio category, investment in money market instruments remains the largest recipient of capital inflows with a total of $3.44 billion, followed by $639.72 million in equity, while investment in bonds stood at $231.22 million.
Foreign Direct Investment (FDI): FDI constituted only 3.66% ($214.25 million) to the total capital inflows. A decline of 16.72% compared to $257.25 million received in Q4 2019 and 13.39% reduction compared to the corresponding quarter of 2019.
FDI is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.
Other Investments: other investments, which was broken down into four categories contributed 22.73% ($1.33 billion) to the total capital importation in the first quarter of 2020. The inflows through other investments reduced by 19.92% when compared to $1.66 billion received in Q4 2019.
Investment through trade credits in the first quarter of 2020 was $50,000, Loans ($559.79 million), Currency deposits ($820,000) while other claims scooped the highest share of $769.99 million.
Capital inflows by Sectors
A further look into the report shows that the banking sector received the largest portion of capital importation as it constituted 51.08% ($2.99 billion) to the total capital inflows, followed by Financing, which received $1.33 billion (22.77%) in Q1 2020.
Shares followed with $817.38 billion (13.96%), Production $273.97 billion (4.68%) while Telecoms received $157.48 billion (2.69%).
Capital inflows by origin
The United Kingdom remains the biggest source of capital investment in Nigeria. In Q1 2020, investment from the U.K amounted to $2.91 billion, up from $1.19 billion received in Q4 2019 and decline compared to $4.48 billion in Q1 2019.
The top five countries that accounted for the biggest capital inflows in Nigeria within the quarter include U.K ($2.91 billion), South Africa ($692.63 million), UAE ($532.89 million), Netherlands (441.79 million), and U.S ($389.1 million).
Nigeria’s external reserves up by 7% in 21 days, currency speculators to lose over N10 billion
It should be noted that Nigeria’s external reserves went on a downward slide last year, having lost $11.75 billion within a space of 10 months.
The continuous increase in Nigeria’s external reserves appears to have been sustained as it recorded a third consecutive week of growth at the end of last week. Available data from the Central Bank of Nigeria (CBN) show that the country’s external reserve had risen to about $35.77 billion as of May 21, 2020.
Despite the volatility of the foreign exchange market due to decline in crude oil export earnings, the external reserves increased sharply by almost $1 billion in just 9 days, rising from the $34.78 billion that it recorded on May 12, 2020, to about $35.77 billion that it ended with on May 21, 2020.
Nigeria’s external reserves have been on a steady increase since April 29, 2020, when it stood at $33.42 billion. This represents an increase of about $2.35 billion or 7% in 21 days.
It should be noted that Nigeria’s external reserves went on a downward slide last year, after hitting a peak of $45.17 billion on June 11, 2019, thereby losing $11.75 billion within a space of 10 months.
The recent gradual increase of the external reserves and improved liquidity in the foreign exchange market, thanks to the CBN, have helped to strengthen the naira at the Investors and Exporters (I&E) window. This was especially the case last week when the naira exchanged at N385.94 to a dollar from N386 to a dollar.
Note that the improved liquidity in the foreign exchange market and the continuous increase in the country’s external reserves were also made possible by the recent disbursement of $3.4 billion emergency facility by the International Monetary Fund (IMF) to the CBN on May 6, 2020. The money was intended to help Nigeria mitigate the impact of the coronavirus pandemic.
Recall that the naira has been under pressure against other major currencies, particularly the dollar, even as currency speculators have been making a lot of demands for dollars so as to make profits on future sales.
Just last week, the CBN Governor, Godwin Emefiele, had to warn speculators and businesses to stop patronizing the parallel market operators. According to him, the rates they are buying dollar now are unrealistic and possibilities abound that they will lose their money if they continue to do so. It has been estimated that speculators could incur over N10 billion losses.
In the meantime, Governor Emefiele had promised more liquidity in the forex market, assuring that all genuine dollar demands by businesses and individuals will be met. This is coming against the backdrop of the planned resumption of dollar sales to the Bureau De Change Operators (BDC) by the CBN after almost 6 weeks that was suspended due to the lockdown occasioned by the coronavirus pandemic. The President of Association of Bureau De Change Operators (ABCON), Aminu Gwadebe, had pointed out that the return of the BDCs to the forex market will help chase away speculators, curb rising inflation, boost productivity and employment, enhance price discovery, enhance market transparency and competitiveness.
Financial Institutions still the fastest growing sector in Nigeria
Banks and other financial institutions posted a 24% GDP Growth Rate for the First Quarter of 2020.
Financial Institutions in Nigeria reported a GDP Growth rate of 24% for the first quarter of 2020 compared to 22.3% in the last quarter of 2019 and a contraction of 9.21% in the corresponding quarter of 2019. This is according to data from the National Bureau of Statistics.
Financial Institutions sub-sector include commercial banks, merchant banks, micro-finance banks, and FinTechs, and other non-banking financial institutions.
Based on the data, Financial Institutions retain their position as the fastest-growing sub-sector in the Nigerian Economy. Growth in the sector remains miles ahead of every other sector in the economy and higher than the overall GDP growth rate of 1.87% for the quarter. The closest to Financial Institutions Telecommunication and Information Sub-sector at 9.71%.
Bank Q2 Results
Apart from data from Commercial Banks, other financial institutions not quoted on the Nigerian Stocks Exchange do not publish their reports in public. However, available data from some of the largest banks in Nigeria reveal growth in gross earnings was recorded across board.
About 8 of the banks that published their first-quarter results posted about N836.2 billion in gross earnings compared to N755 billion representing a 10.8% growth. Most of the growth was from the merger between Diamond Bank and Access Bank.
Effects of Covid-19
Several reports published in Nairametrics suggest banks face headwinds from the Covid-19 Pandemic. An Augusto & Co report assessed the impact of the coronavirus pandemic on the asset quality of the Nigerian banks. According to details in the report, banks are significantly exposed to several sectors which include the oil and gas sector, manufacturing, real estate, public sector, construction, and general commerce.
It mentions that about 47% of the banking industry’s gross loans are in foreign currency. The report suggests that the coronavirus pandemic will weaken the asset quality of Nigerian banks in view of the impact on State Governments’ finances, purchasing power of households and the performance of businesses. Although the degree of impact will vary across different sectors, the key sectors that will bear the brunt are oil and gas (upstream), real estate, construction, transportation (aviation), and manufacturing (non-essentials).
CEO of one of Nigeria’s top banks, Zenith Bank Plc, Ebenezer Onyeagwu, also commented on the effect of the Coronavirus on the sector. Speaking to CNBC Africa, Onyeagwu stated that one of the most immediate impacts of the Pandemic is the fact that the oil price crash will have negative implications for banks’ revenue targets.
“In terms of banking, the drop in the price of crude is affecting directly the exposure that banks have created in the oil and gas sector. Revenues are challenged now, no doubt. And you have a situation where revenues are challenged, the obvious next step will be for you to restructure,” Onyeagwu stated.
The data is symptomatic of a twisted economy altered by several heterodox policies that have kept interest rates high for banks and lending short for SME’s and Real Sectors of the economy. With several sectors in the country posting a negative GDP growth rate in the first quarter of 2020, the outlook for the second quarter portends an even worse outcome for the rest of the economy. While banks have weathered tougher challenges in the past a weaker than expected economy will likely stunt its growth in the coming quarter.
More recent CBN Policies of stiffer CRR and 65% loan to deposit ratios imposed on banks to lend to the private sector. The CBN was meant to meet on Friday for its monetary policy meeting for May but postponed till Thursday. Some analysts point to a softer monetary policy stand that could see it relax its CRR and LDR requirements. This is assuming the latest GDP numbers do not reinforce its resolve to get backs to support the economy following the impressive GDP growth rate.