Nigerians misunderstand tax rules, risk costly compliance mistakes daily

When Joyce expanded her fashion business to serve international clients, taxes were not her main concern. Joyce is a fashion entrepreneur in the heart of Lagos and has been running her business for many years.

Like many entrepreneurs, she assumed that her obligations were limited, especially since she did not earn a formal salary.
“I don’t earn a salary, so I don’t think I need to worry about personal income tax,” she said.
It was only after speaking with a tax professional that she realised her understanding was incomplete.

Across Nigeria, many people lack this knowledge, which makes it difficult to tell the difference between tax avoidance and tax evasion.

Why this matters now
Nigeria is under increasing pressure to grow non-oil revenue, with tax collection becoming a central policy focus. The Federal Inland Revenue Service (FIRS) reported N22.59 trillion in tax collections between January and September 2025, reflecting aggressive efforts to widen the tax net.

The country’s tax-to-GDP ratio has also climbed to about 13.5 percent as of late 2025, up from below 10 percent in previous years. Yet, it remains below the African average of around 16 percent, underscoring the gap the government is trying to close.

Read also: The whistleblowing policy as a game changer in tackling tax fraud (Part 1)

As enforcement tightens, the distinction between tax evasion and tax avoidance is no longer theoretical; it is becoming a real compliance risk for individuals and businesses alike.

The misconceptions driving non-compliance
Much of the confusion stems from widely held but incorrect assumptions about tax obligations.

According to insights from Olaniwunajayi in an article titled ‘Demystifying Taxation in Nigeria: Addressing Common Misconceptions in Tax,’ one of the most common beliefs is that income must come from a salary to be taxable.

“I don’t have to pay personal income tax if I do not earn a salary, not true,” the firm noted, referencing provisions of the New Tax Act. Income from trade, business, and investments remains taxable, even without formal employment.

Another widespread misconception is that Pay-As-You-Earn (PAYE) deductions eliminate the need for personal filing.
“This assumption is incorrect. PAYE deductions only apply to income from employment, individuals are still required to file their personal income tax returns, including total earnings from other sources,” the firm explained.

These gaps in understanding often create a grey area where taxpayers unintentionally drift into non-compliance.

Read also: Abaribe tasks CITN to demand accountability of tax payments

Tax avoidance vs tax evasion: where the law draws the line
At the heart of the issue is a distinction that appears simple but is frequently misunderstood.

Tax avoidance is legal. It involves structuring financial affairs in a way that reduces tax liability within the bounds of the law through deductions, allowances, and incentives.

“Tax avoidance is entirely legal as it entails using tax laws to structure business affairs in a manner that minimises tax liability within the bounds of the law,” Olaniwunajayi stated in their article.
Tax evasion, however, is illegal.

It includes deliberately falsifying records, concealing income, or misrepresenting financial obligations to avoid paying taxes.

Legal practitioners at Adeola Oyinlade & Co emphasise the distinction clearly: “Tax evasion involves illegal and unethical practices, while tax avoidance, when carried out within the bounds of the law, is a legal and ethically acceptable way of minimising one’s tax liability.”

The economic implications are significant.
“Tax evasion contributes to a range of economic, social, and institutional challenges, hindering economic growth, reducing government revenue, and exacerbating income inequality,” the firm added.

In Nigeria, the line is often blurred
For many Nigerian businesses, the issue is not always intent but awareness.
Abidemi Adetula, a civic-tech founder who works closely with SMEs, points to a more subtle but widespread problem: outdated knowledge.

“The most dangerous tax mistake Nigerian SMEs make? Not fraud, nor evasion. It’s simply not knowing what changed,” he said.
Most people are still calculating PAYE using the 2024 method. Some are over-deducting. Some are under-deducting. Very few can confidently explain their annual filing obligations.”

The consequence, however, is the same.
“NRS doesn’t care that you didn’t know the rules changed. The penalties are the same either way.”
This highlights a critical behavioral reality: in Nigeria’s tax environment, ignorance can quickly translate into liability.

What many Nigerians still get wrong about tax compliance
Beyond the legal distinction between tax avoidance and tax evasion, several practical questions continue to come up among taxpayers, particularly small business owners, freelancers, and even salaried employees with side income.

Do I need to register for tax if I just run a small business or freelance?
Yes.
Under Nigeria’s tax laws, anyone earning taxable income must register with the relevant tax authority. Failure to do so is not treated lightly.

According to provisions in the Nigeria Tax Administration Act, a taxable person who fails to register is liable to a penalty of N50,000 in the first month, and N25,000 for each additional month the failure continues.

In a stricter twist, companies or government agencies that transact with unregistered individuals also face consequences, with penalties of up to N5 million for awarding contracts to unregistered persons.

If my taxes are deducted (PAYE), do I still need to file returns?
Yes, and this is one of the most misunderstood areas.

As earlier noted by Olaniwun Ajayi LP, PAYE only covers employment income. Filing returns is a separate legal obligation that captures your total income across all sources.
Failure to file returns or submitting incorrect ones can trigger penalties.

The law provides that a taxpayer who fails to file or submits incomplete or inaccurate returns is liable to N100,000 in the first month and N50,000 for every subsequent month of default.

What if I don’t keep proper records?
For many small businesses in Nigeria, this is where problems begin.

Operating without proper documentation may seem harmless, but it directly affects your ability to calculate and defend your tax position.
Under the law, failure to keep proper books or provide records when requested attracts penalties. Individuals may be fined N10,000, while companies face penalties of N50,000.

While these amounts may appear modest, tax professionals warn that poor record-keeping often leads to deeper issues such as estimated assessments, disputes, and additional liabilities.

Enforcement is getting stricter
Authorities are increasingly relying on technology and legal powers to detect non-compliance.

The tax authorities, including the NRS and state services, are “increasingly using technology to track income and ensure compliance,” according to Olaniwun Ajayi.
Recent legislative developments are also strengthening enforcement.

Toheeb Ipoade, an expert tax practitioner, explained that under the Nigeria Revenue Service Act, 2025, the agency is empowered to “identify, trace, freeze, confiscate, or seize proceeds derived from tax fraud or evasion.”
“The cost of compliance is significantly lower than the consequences of non-compliance,” he said, warning that as authorities begin to exercise these powers fully, financial and legal risks will intensify.

Despite stricter enforcement, taxpayer behaviour in Nigeria is still shaped by deeper issues, particularly trust.
A common sentiment among taxpayers is that taxes do not translate into visible personal benefits.
But tax experts push back on this notion.

“Tax is a compulsory contribution backed by law, not a payment-for-service from which you expect direct personal benefits,” Olaniwun Ajayi explained, noting that revenues fund public infrastructure and services for collective use.

This disconnect between obligation and perceived value continues to influence compliance decisions, especially among small businesses operating in a cash-driven, informal economy.

At its simplest, the distinction is clear:
Tax avoidance reduces liability within the law while tax evasion hides income outside it.
But in practice, many Nigerians operate in the space between, where incomplete knowledge, poor documentation, and evolving tax rules create risk.

As Nigeria pushes to increase its tax-to-GDP ratio to 18 percent by 2027, enforcement will likely become more sophisticated, leaving less room for ambiguity.
For taxpayers like Joyce and millions of others, the message is becoming harder to ignore, which is to use the law smartly but not cross the line.