Explainer: Presumptive tax – How Nigeria is taxing its informal economy

For years, many small businesses in Nigeria operated outside the conventional tax system because they kept little or no accounting records, making it difficult for tax authorities to determine how much income they actually earned.

Nigeria’s new Presumptive Tax Regulations, which took effect on January 1, 2026, seek to change that by introducing a simplified framework for taxing eligible informal businesses while encouraging them to gradually transition into the regular tax system.
Issued under Section 29 of the Nigeria Tax Act, 2025, the regulations establish how tax authorities can assess businesses whose income cannot be accurately determined, while setting out exemptions, digital payment requirements and new taxpayer protections.

Why the regulations were introduced
The informal sector accounts for a significant share of Nigeria’s businesses and employment, yet many operators do not maintain financial records that allow tax authorities to calculate income under the normal tax rules.
The presumptive tax framework is designed to broaden the tax base, provide a practical way to assess businesses where conventional methods are ineffective, and encourage businesses to adopt better record-keeping as they grow.
According to Olufemi Michael Olarinde, head of Fiscal and Tax Reforms Implementation at the Nigeria Revenue Service (NRS), the regulations are intended to provide “clarity, certainty and uniformity” in taxing the informal economy.

Who the regulations apply to
The framework targets individuals and businesses operating in the informal sector whose income cannot be reasonably determined because they do not keep adequate accounting records.
However, it does not apply to businesses already exempt under the Nigeria Tax Act, taxpayers with reliable financial records, or eligible nano businesses with annual turnover below N12 million.
This means not every trader or small business owner will automatically pay presumptive tax.

How the 1% tax works
One of the most publicised provisions is the introduction of a 1 percent presumptive income tax.
Instead of calculating tax from audited profits, the tax authority may assess qualifying businesses using actual or estimated turnover derived from available information such as business activity, location, transaction patterns and other economic indicators.
For businesses that qualify under the regime, the tax payable is generally 1 percent of actual or estimated annual turnover.
The regulations also introduce a 2 percent presumptive capital gains tax on qualifying capital transactions covered under the framework.

Businesses below N12 million
Perhaps the most important provision for many micro businesses is the N12 million turnover threshold.
Eligible nano businesses below this threshold are excluded from the presumptive tax regime, meaning the regulations are primarily targeted at businesses operating above that level or those otherwise captured under the law.

The end of cash tax collection
The regulations also strengthen digital tax administration.
Taxes are expected to be paid through approved electronic channels, including USSD, POS terminals, mobile applications and licensed financial technology platforms.
Cash collections and roadside tax collections are expressly prohibited, a move aimed at improving transparency and reducing opportunities for illegal collections.

Tax ID becomes more important
Another key feature is the increased emphasis on taxpayer identification.
Businesses covered by the framework are expected to obtain a Tax Identification Number (TIN), supporting the government’s broader objective of creating a more integrated and digital tax administration system.

A pathway into the formal economy
Perhaps the biggest shift introduced by the regulations is that presumptive tax is not intended to be permanent.
Businesses that begin maintaining proper accounting records can transition into the regular self-assessment tax system, while tax authorities may also move taxpayers out of the presumptive regime where appropriate.

Tax adviser Temitayo Ogunyemi says the framework reflects the different stages of business development rather than treating every enterprise the same way.
He likened it to three entrepreneurs at different stages of growth, a roadside food vendor, a neighbourhood fashion business and a technology consultancy with structured accounting systems, arguing that each business should not necessarily be assessed using the same approach.

According to him, the regulations create a gradual pathway from informal operations to stronger financial management and eventual participation in the regular tax system.
“The greatest advantage under Nigeria’s evolving tax framework is not paying a lower percentage. It is understanding where your business fits within the system and making informed decisions as your business grows,” Ogunyemi said.

New dispute resolution channel
The regulations also recognise the Tax Ombud as a platform through which taxpayers can raise complaints relating to tax administration, providing an additional avenue for resolving disputes outside the traditional enforcement process.

What business owners should do
Tax professionals say business owners should look beyond the headline 1 percent rate and instead determine whether the framework actually applies to their businesses.
They also recommend improving record-keeping, understanding compliance obligations, obtaining a Tax Identification Number where required, using approved electronic payment channels and seeking professional tax advice before relying on information circulating on social media.
Ultimately, the regulations are designed not only to simplify taxation for hard-to-assess businesses but also to encourage gradual formalisation, better financial records and improved voluntary tax compliance across Nigeria’s informal economy.