Tax Reforms: Why Businesses Should Focus on Payroll and VAT Compliance

The full rollout of Nigeria’s Tax Reform Acts marks a significant shift with far-reaching consequences for both the private and public sectors. The new framework compels businesses to reassess their operations quickly to avoid stiff sanctions and regulatory setbacks.

One immediate relief under the new regime is for salary earners, especially those earning below N800,000 annually, who are expected to see a modest increase in take-home pay from the end of January. This adjustment reflects changes introduced by the revised personal income tax structure.

At the same time, businesses are required to apply and report Value Added Tax (VAT) and Withholding Tax (WHT) in full, regardless of any pending legal debates surrounding the reforms. These transaction taxes have emerged as critical compliance priorities for organisations across the country.

Overall, the suite of new tax laws—including the Nigeria Tax Administration Act, the Nigeria Revenue Service (Establishment) Act, the Joint Revenue Board (Establishment) Act and the Nigeria Tax Act—signals a move away from routine compliance toward urgent operational realignment. Under the new rules, individuals earning N800,000 or less annually are exempt from income tax, while higher earners are taxed on a graduated scale, with rates rising to 25 per cent for top income brackets.

The VAT framework has also been expanded, allowing companies to claim input VAT on services and fixed assets, in addition to goods purchased for resale or production. Furthermore, the law mandates the use of electronic fiscalisation systems, including e-invoicing, for VAT collection and reporting. On WHT, companies are required to deduct and remit taxes promptly, with penalties for non-compliance reaching up to 40 per cent of the unpaid amount, alongside interest charges and possible criminal liability.

Speaking on the implications of the reforms at the 2026 Nigeria Economic Outlook organised by FirstBank in Lagos, Kenneth Erikume, Partner, Tax Reporting and Strategy at PwC, identified payroll and the automation of VAT and WHT processes as the most urgent issues for businesses. He warned that failure to comply could attract severe penalties.

According to him, payroll systems must be updated immediately to reflect the new tax thresholds and rates, as staff salaries are paid monthly. He explained that incomes up to N800,000 are now exempt, with higher earnings taxed progressively, and income above N50m subject to a 25 per cent rate. As a result, employees earning below N25m annually are likely to see higher take-home pay, while those above that level may experience reduced net income due to higher tax obligations.

Erikume noted that this creates a human capital challenge, as organisations may need to decide whether to absorb part of the increased tax burden for higher-earning staff. He stressed that payroll adjustments are the most immediate concern and require urgent attention.

He further emphasised that VAT and WHT are equally critical areas. He described the VAT reforms as a major opportunity for cost reduction, noting that businesses can now potentially lower costs by up to 7.5 per cent through expanded VAT claims on overheads and fixed assets. He explained that VAT on costs should now be treated as a recoverable asset rather than an expense, allowing it to be offset against output VAT during filing. However, he cautioned that systems must be updated to capture this correctly.

Erikume also highlighted compliance risks related to dealing with vendors without Tax Identification Numbers (TINs). Under the new rules, transactions with unregistered vendors can attract penalties of up to N5m. This, he said, requires businesses to strengthen vendor onboarding and validation processes, including in cases involving informal suppliers or reimbursements.

On WHT, he warned that errors in deduction or remittance could result in penalties of up to 40 per cent, making automation essential to reduce risks associated with manual processes. He stressed the need for close collaboration between finance and IT teams to ensure accurate implementation based on the final version of the law passed by the National Assembly.

Adding a legal perspective, corporate and technology lawyer Nneoma Agwu-Okoro, in her Legal Bytes newsletter, noted that all VAT-able transactions must be calculated, collected and remitted accurately and on time. She stressed that WHT deductions on payments to contractors, suppliers and service providers must also be handled correctly, particularly for fintechs and businesses with high transaction volumes, where automation is crucial to prevent cumulative liabilities that could erode profits.

She urged businesses to maintain strict compliance across all operations, including low-margin activities, by keeping monthly reconciliations, proper documentation and clear audit trails. She noted that tax authorities now have the capacity to cross-check bank accounts, payment platforms and TIN-linked records, making proactive compliance essential.

PwC’s 2025 Nigerian Tax Reforms Insight Series further advises that all taxable individuals and entities must register for tax and obtain a TIN to avoid significant penalties. Awarding contracts to unregistered persons now attracts fines of up to N5m, while late or inaccurate filings result in escalating monthly penalties. Adequate record-keeping, timely responses to tax authority requests and the use of approved electronic fiscalisation systems are also mandatory, with non-compliance attracting daily penalties and interest.

Special caution is advised for operators in the petroleum and mineral sectors, who face some of the heaviest sanctions for late filing or payment, including daily fines, interest linked to prevailing financial benchmarks, and the risk of asset seizure or licence cancellation. Businesses are therefore encouraged to adopt robust compliance systems, including automated reminders, regular internal audits and prompt engagement with tax authorities, to mitigate risks under the new tax regime.