50% labour cost deduction under the 2025 Nigeria Tax Act

In mid-2023, the Nigerian economy experienced immediate and far-reaching shocks. Government reforms, most notably the removal of the petrol subsidy and the harmonisation of the exchange rate, triggered steep increases in fuel prices, transportation costs, and food prices, placing significant pressure on households and businesses across the country. During this period of economic turbulence, many employers voluntarily introduced wage awards, transport allowances, and cost-of-living adjustments to help their employees manage the sudden rise in living costs.

Section 162(3) of the Nigeria Tax Act (NTA) appears to acknowledge and reward these interventions by introducing a special tax incentive for companies that supported low-income workers or expanded their workforce during the 2023 to 2025 period. The provision serves a dual purpose: to recognise companies that voluntarily supported vulnerable workers during a period of economic hardship, and to encourage employers to retain or grow their workforce rather than resort to involuntary redundancies.

Under this provision, companies may claim an additional 50% tax deduction, in the relevant years of assessment, for qualifying labour-related costs incurred in any two calendar years within the 2023 to 2025 period. This additional deduction is intended to recognise employer actions that either raised the earnings of low-income workers or resulted in net employment growth during the specified period. Qualifying labour costs include wage awards, salary increases, transportation allowances, or transport subsidies that bring a low-income worker's gross monthly earnings up to a maximum of ₦100,000. Increases granted to employees already earning above ₦100,000 do not qualify for the additional deduction.

Key concerns affecting the applicability of the law

Despite its good intentions, several interpretational and operational gaps may hinder effective implementation. Key concerns include:

1.     Undefined “relevant years of assessment”

The Act provides that the additional deduction is to be claimed in the "relevant years of assessment" but does not define which years qualify as relevant. This ambiguity leaves room for inconsistent application and could give rise to disputes during tax reviews.

2.     Determining the “average net employment”

The Act defines net employment as total hires minus total disengagements, whether voluntary or involuntary, during the calendar year and uses this figure to determine eligibility for the 50% additional deduction on salaries paid to new employees. While this definition provides a starting point, the absence of robust and consistent guidance may lead companies to adopt varying interpretations, creating uncertainty and potential challenges during tax reviews and audits.

3.     The three‑year retention test and consequences of non‑compliance

A key condition for claiming the 50% additional deduction is that newly hired employees must not be involuntarily disengaged within three years of hire. This requirement raises several compliance and audit risk considerations. In particular, further clarity is needed on how the retention condition applies in scenarios involving business restructuring, redundancy exercises, or liquidation. Without detailed administrative guidance, companies risk having deductions disallowed or facing disputes during audits, especially where their interpretation of the retention condition differs from that of the NRS.

Conclusion

The 50% additional deduction for labour‑related costs has the potential to significantly reduce tax liabilities for qualifying companies and to reward employers that protected vulnerable workers during a challenging economic period. However, the absence of detailed administrative guidance on key aspects of the incentive may pose challenges for taxpayers seeking to apply it with confidence, increasing the risk of disallowed deductions and audit disputes.

To facilitate proper implementation and ensure the incentive achieves its policy objectives, the NRS should issue clear guidance addressing these operational gaps. In the interim, companies are advised to exercise caution, maintain comprehensive documentation of all relevant employment actions and labour-related costs, and seek professional advice when assessing eligibility.

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