Taxing For Equity: Can Nigeria’s 2025 Personal Income Tax Reforms Bridge The Inequality Gap?
ABSTRACT
Poverty and income inequality are prominent sustainable development goals (SDGs) that have gained global attention in the last 10 years.
In Africa, approximately 460 million people live in poverty as of 2022, with a poverty rate of 43.1%, surpassing the global poverty rate of 42.8%. This is particularly a serious case in Nigeria a country identified as one of the leading hubs of poverty in Africa.
This study explores Nigeria’s Personal Income Tax (PIT) system and its impact on tax equity and income inequality. Although Nigeria has introduced several reforms including the 2004 and 2011 PIT amendments and the new Nigeria Tax Act (NTA) of 2025 the country still records one of the lowest tax-to-GDP ratios globally, therefore leading to the unanswered question if this new reform will be able to bridge the growing gap of inequality.
Using the principles of vertical equity and the ability-to-pay theory, the study assessed how progressive taxation and relief measures were meant to reduce disparities. Empirical evidence based on indicators such as the Gini coefficient and Kakwani Index shows that PIT was largely progressive before 2011, but later reforms weakened its redistributive impact due to poorly targeted allowances.
The 2025 reforms attempt to restore progressivity by adjusting tax brackets, exempting low income earners, digitizing tax processes, broadening the tax base, and improving enforcement through the Nigeria Revenue Service.
However, challenges such as a large informal sector, widespread non-compliance, tax evasion, and administrative corruption reduce PIT’s effectiveness in addressing inequality.
Comparative findings further indicate that while corporate taxes contribute to equity, consumption taxes like VAT and CED are regressive.
Overall, stronger institutions, transparency, and fair public spending are essential for PIT reforms to successfully reduce poverty and inequality in Nigeria.
Keywords: Income inequality, Personal Income Tax (PIT), Regressive, Progressive taxation, Tax equity.
Introduction
Tax equity requires fair sharing of tax burdens, with higher-income earners contributing more and those in similar situations paying similar amounts.
Nigeria’s 2025 Personal Income Tax reforms aim to improve equity through new tax bands, low-income reliefs, and better compliance, building on earlier reforms such as the 2011 reduction of the lowest tax rate from 7% to 5%.
However, rising poverty now affecting over 40% of Nigerians shows that inequality persists despite these efforts.
The core argument is the unanswered question, if this new reform will be able to bridge the growing gap of inequality?
Although the 2025 reforms are a positive step, weak enforcement, limited informal-sector coverage, and poor accountability may reduce the effectiveness of this reform. Progressive taxation and efficient institutional improvements will help bridge inequality gaps.
Conceptual Clarification
Tax equity refers to fairness in how taxes are shared among members of society. It ensures that people contribute according to their ability to pay and that public spending benefits are distributed based on need.1
Tax equity is guided by two main ideas: the benefits principle, where people pay taxes based on the benefits they receive, and the ability-to-pay principle, which requires those with higher income or wealth to contribute more.
Vertical equity reflects this second principle by ensuring higher-income individuals pay a larger share of their income, forming the basis of progressive tax systems where tax rates rise with income. For instance, someone earning $30,000 may pay 25% in taxes compared to 10% for someone earning $5,000. When tax systems or reliefs are poorly designed, however, they can place heavier burdens on low-income earners, reducing fairness.2
Nigeria’s PIT reforms in 2004 and 2011 were intended to promote equity, including reducing the lowest tax rate from 7% to 5%, but studies show that poorly targeted relief allowances benefited higher-income earners and reduced the system’s redistributive impact.
Research using inequality measures such as the Gini coefficient and Kakwani Index revealed that PIT was progressive before 2011 but became partly regressive afterward unless reliefs were directed toward low-income groups.3
Other taxes like VAT, CED, and PPT tend to worsen or have little effect on inequality, while CIT helps reduce it, showing that fair taxation requires broad coverage, strong enforcement, and well-designed reliefs. The 2025 PIT reforms aim to restore equity by revising tax bands and widening the tax net, but their effectiveness will depend on better enforcement and transparent revenue management.4
Overview of Nigeria’s Personal Income Tax System and Inequality Context
Nigeria’s Personal Income Tax (PIT) system, governed by PITA 1993 and amended in 2011, plays a central role in national revenue but operates within one of the world’s lowest tax-to-GDP ratios at 10.8%.
In 2025, Nigeria introduced the Nigeria Tax Act (NTA), a major reform consolidating multiple tax laws and modernizing the personal income tax (PIT) system. Effective January 2026, the reforms clarify tax residency, make Nigerian residents liable for worldwide income, and ensure trailing income is taxable. The PIT structure is now progressive, exempting those earning up to ₦800,000, while high earners pay up to 25%.
The Consolidated ReliefAllowance was replaced with a capped rent allowance, and compensation for loss of employment or injury is tax-exempt up to ₦50 million.5The reforms emphasize digital compliance, mandating e-invoicing, real-time VAT reporting, and digital filing, with the Nigeria Revenue Service (NRS) overseeing federal tax administration.
The reforms also expand the taxation of capital gains by aligning the Capital Gains Tax (CGT) rate with PIT rates, replacing the former flat 10% rate, and introducing provisions for indirect offshore share transfers. Corporate taxation was also reformed, including exemptions for small companies, a 4% Development Levy, and a minimum effective tax rate for large corporations. VAT administration was updated for fairness and efficiency.6
Nigeria’s tax system is meant to reduce inequality, but it often does the opposite. Instead of being truly progressive, it leans toward being regressive, making the poorer population spend a larger proportion of their income on these taxes compared to wealthier individuals.
Nigeria suffers a great loss with issues covering tax compliance, tax evasion and avoidance. Many people in the large informal sector do not pay income tax, while richer individuals often exploit loopholes to avoid paying their fair share, further exacerbating income inequality.7
Corruption within the tax administration is another significant problem. Nigeria scores high on corruption indices, indicating a pervasive issue that affects various sectors, including tax administration.8
Corruption undermines the effectiveness of taxation as a tool for income redistribution by diverting public resources into private hands. With over 40% of Nigerians living in poverty, weak enforcement and governance challenges prevent PIT from significantly reducing inequality, highlighting the need for stronger redistribution and comprehensive fiscal reform.9
Thus, by focusing on progressive taxation, Nigeria has an opportunity to reallocate resources more equitably, ensuring that wealthier individuals contribute their fair share to national development.10 Therefore if low-income earners are exempted (or pay very little) and higher-income earners face higher rates, tax becomes more progressive.
This helps reduce the tax burden on those least able to pay, giving them more disposable income and reducing the income gap. In Nigeria’s case, Personal Income Tax revenue could support programs that uplift poorer communities, help job creation, and reduce poverty.
As the higher collection from those who can afford to pay allows the government to fund services (education, health, and infrastructure) that will benefit lower-income groups.11 Exempting low-income earners and increasing taxes on the better off is viewed as a positive equity move. When people see that taxes are applied
Comparative analysis
Nigeria’s new personal income tax rules move the country closer to a genuinely progressive system. However, studies still describe Nigerian Personal Income Tax as limited in its impact because a large informal sector, weak enforcement and loopholes mean many rich individuals escape full taxation.12
In South Africa, by contrast, Personal Income Tax has been used for longer as a deliberate tool to tackle inequality. OECD and local research show that direct taxes and transfers, including Personal Income Tax, significantly reduce the Gini coefficient, even though deep inequality still remains.13 The system is more progressive on paper and collects more from top earners, but high unemployment and wealth gaps limit how far Personal Income Tax alone can go.
In a world power like the United States, federal income tax is also broadly progressive and clearly lowers post-tax inequality, though some scholars argue its redistributive effect has weakened over time.14
Compared with South Africa and the United States, Nigeria’s Personal Income Tax is becoming more progressive, but to seriously reduce inequality it must be backed by stronger enforcement and better coverage of high-income and informal taxpayers.
Conclusion
An efficient personal income tax system has a good potential to narrow Nigeria’s growing inequality gap by ensuring that the tax burden is shared more fairly across income groups. Strengthening the progressivity of Personal Income Tax, by raising the tax-free threshold for low-income earners and modestly increasing rates for higher-income groups helps ensure that those with the least are protected, while those with greater financial capacity contribute proportionately more. However, progressivity alone is insufficient.
Nigeria must also close the loopholes and weak enforcement practices that enable wealthy individuals to underpay or avoid taxes altogether. Leveraging digital payroll reporting, linking taxpayer information through BVN and NIN, and targeting high-risk earners through specialized audit units would significantly reduce evasion and strengthen equity within the system.
Enhancing Personal Income Tax collection also provides an opportunity to reduce reliance on regressive taxes such as VAT, which currently place a disproportionate burden on the poor. For the reform to meaningfully reduce inequality, a portion of Personal Income Tax revenue should be directed toward essential public services, particularly basic education, healthcare, and community infrastructure that have the strongest equalizing effect on low-income households.
Finally, improving transparency in how Personal Income Tax revenue is used can build public trust, encourage voluntary compliance, and create a positive cycle of higher revenue and greater investment in social development.
Together, these measures can transform Nigeria’s personal income tax reform from a technical adjustment into a deliberate strategy for promoting fairness, strengthening social mobility, and bridging the inequality gap.
Bibliography
Journals
Cruz Echevarria, ‘Income Tax Progressivity, Growth, Income Inequality and Welfare’ (2014) SERIEs Electronic Journal.
Eneisik Gogo, ‘Effects of Taxes on Income Inequality in Nigeria’ (2025)11(2) Journal of Accounting and Financial Management.
Jasper Kim, ‘Inequality: why equity and fairness should be part of tax policy’ (2020) 9 (3) Journal of Governance and Regulation.
Udonna Ezeani, ‘Critical Analysis of Personal Income Tax in Nigeria’ (2025) SSRN Electronic Journal.
Website Publications
Afriwise, ‘Tax administration in Nigeria: A review of 2025 tax reform laws’ (Afriwise, 10 July 2025).
Edeh, H.C,’Assessing the Equity and Redistributive Effects of Taxation Reforms in Nigeria’ (ICTD, 23 November 2021).
Falilou Fall, ‘Strengthening the tax system to reduce inequalities and increase revenues in South Africa’ (OECD, 15 December 2022).
Koleade Adeoye, Nigeria’s 2025 tax act reform explained: key changes, business impact and compliance strategies’ (bakertilly, 23 August 2025).
Studysmarter, ‘Tax Equity’ (Studysmarter, 11 November 2022).
TJNA, ‘New report calls for progressive taxation of Nigeria’s wealthiest to bridge revenue gaps’, (Tax Justice Network Africa, 24 March 2025).
WJP, ’Regulatory Enforcement in Nigeria’ (World Justice Project, 23 October 2024).
1 Jasper Kim, ‘Inequality: why equity and fairness should be part of tax policy’ (2020) 9 (3) Journal of Governance and Regulation<https://www.researchgate.net/quality >accessed 12 November 2025.
2 Studysmarter, ‘Tax Equity’ (2022) <Tax Equity: Definition, Example, Vertical & Horizontal> accessed 12 November 2025.
3 Edeh, H.C,’Assessing the Equity and Redistributive Effects of Taxation Reforms in Nigeria’, (ICTD, 23 November 2021) <Assessing the Equity and Redistributive Effects of Taxation Reforms in Nigeria – ICTD> accessed 12 November 2025.
4 ibid.
5 Afriwise, ‘Tax administration in Nigeria: A review of 2025 tax reform laws’, (Afriwise, 10 July 2025) < https://www.afriwise.com/bls > accessed 13 November 2025.
6 Koleade Adeoye, ‘Nigeria’s 2025 tax act reform explained: key changes, business impact and compliance strategies’, (bakertilly, 23 August 2025). < https://www.bakertilly.ng/id > accessed 13 November 2025.
7 Eneisik Gogo, ‘Effects of Taxes on Income Inequality in Nigeria’ (2025)11(2) Journal of Accounting and Financial Management< https://iiardjournals.org/get/.pdf> accessed 13 November 2025.
8 WJP, ’Regulatory Enforcement in Nigeria’ (World Justice Project, 23 October 2024), <https://worldjusticeproject.org/rulent> accessed 13 November 2025.
9 ibid.
10 TJNA, ‘New report calls for progressive taxation of Nigeria’s wealthiest to bridge revenue gaps’, (Tax Justice Network Africa, 24 March 2025) < https://taxjusticeafrica.net/e-gaps> accessed 13 November 2025.
11 ibid.
12 Udonna Ezeani, ‘Critical Analysis of Personal Income Tax in Nigeria’ (2025) SSRN Electronic Journal < https://papers.ssrn.com/s45> accessed 13 November 2025.
13 Falilou Fall, ‘Strengthening the tax system to reduce inequalities and increase revenues in South Africa
’ (OECD, 15 December 2022) <https://www.oecd.org/content/dam/n/pdf> accessed 13 November 2025.
14 Cruz Echevarria, ‘Income Tax Progressivity, Growth, Income Inequality and Welfare’ (2014) SERIEs Electronic Journal < https://link.springer.com/-5>accessed 13 November 2025.
About Authors
Obianuju Lucy Anigbogu is a First class undergraduate studying Law at Afe Babalola University and an Ambassador of LawGlobal Hub.
Ifeoma Racheal Ogbechie is a motivated and detail-oriented law student at Afe Babalola University, with a keen interest in corporate law, energy law, entertainment law, litigation, and legal research.
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