Understanding VAT and Tax Thresholds for Small Businesses in Nigeria (2025 Edition)

Understanding VAT and Tax Thresholds for Small Businesses in Nigeria (2025 Edition)

Running a small business in Nigeria comes with enough challenges; keeping up with tax compliance should not be one of them. Whether you run a consultancy, a retail brand, or a service company, understanding your tax thresholds will help you stay compliant, avoid penalties, and build credibility with banks and clients.

This guide explains how turnover affects your tax obligations under the Nigeria Tax Act 2025, focusing on small businesses earning less than fifty million naira a year.

1. What Qualifies as a Small Company?

A small company, according to the Nigeria Tax Act 2025, is any company that earns not more than fifty million naira in annual turnover and has total fixed assets not exceeding two hundred and fifty million naira.

However, the law excludes businesses that provide professional services—such as accounting, law, or engineering—even if their turnover is under that threshold. Such firms are automatically subject to corporate taxation regardless of size.

2. Company Income Tax (CIT) and the Fifty Million Threshold

Companies with turnover of fifty million naira or less are exempt from Company Income Tax. They pay zero percent on their profits.

Once a company’s turnover exceeds that amount, it becomes fully taxable at thirty percent of its total profits. The tax applies to the entire profit, not just the portion above fifty million. In other words, once a company crosses the threshold, it leaves the small-company category entirely.

3. Should the Business Owner Receive a Salary?

If your company is exempt from tax because its turnover is below fifty million naira, paying yourself a salary may not be necessary. The company already pays no CIT, but a salary would expose you to Pay-As-You-Earn (PAYE) personal income tax.

However, there are valid reasons to maintain a modest salary structure. It can demonstrate formal employment, support pension or NHF contributions, strengthen your loan or visa applications, and project a professional image.

For tax efficiency, many small business owners choose to record personal withdrawals as owner’s drawings instead of salaries. Drawings are not taxable and can be used to manage cash flow without creating extra tax obligations.

4. Household Expenses and Business Deductions

Nigerian tax law allows only expenses that are wholly, exclusively, necessarily, and reasonably incurred for business to be deducted.

Household costs such as personal rent, groceries, family expenses, or school fees cannot be treated as business expenses. The Federal Inland Revenue Service (FIRS) can disallow them, increasing your taxable profit or raising compliance issues.

Genuine business expenses such as office rent, advertising, transportation for business purposes, internet, and professional fees are deductible. Keeping your records clean ensures that once your turnover exceeds fifty million naira, your tax filings remain credible and penalty-free.

5. VAT Threshold and the Twenty-Five Million Rule

The Value Added Tax (VAT) threshold is twenty-five million naira, not fifty million. Businesses that make taxable supplies above twenty-five million naira in a twelve-month period must register for VAT, charge 7.5 percent on invoices, and file monthly returns with FIRS.

If your turnover is below twenty-five million naira, you are not required to register or file VAT at all. However, if you voluntarily register—perhaps to satisfy clients or government contracts—you must submit monthly VAT returns, even during months when you make no sales. Those are called nil returns.

Failure to file returns attracts penalties: fifty thousand naira for the first month of default and twenty-five thousand naira for each subsequent month.

6. Practical Examples

A freelance designer earning twelve million naira annually has no VAT obligations and pays no Company Income Tax.
A small retailer with turnover of thirty million naira must register for VAT and file monthly returns but still enjoys zero percent CIT.
A company earning fifty-five million naira pays both VAT and thirty percent CIT.
Professional service firms pay CIT regardless of turnover.

7. Compliance Habits for Small Businesses

  1. Maintain separate bank accounts for business and personal use.

  2. Keep receipts and invoices for all business-related transactions.

  3. Avoid claiming personal or household costs as business expenses.

  4. File monthly VAT returns promptly, even if nil.

  5. File annual returns with CAC and FIRS to stay in good standing.

  6. Use digital accounting tools such as Baha’s Books or QuickBooks Online to automate record-keeping and tax compliance.

8. The Bottom Line

Businesses earning less than fifty million naira enjoy the most flexible phase of their tax journey—zero percent Company Income Tax and, in many cases, no VAT obligations.
However, this is also the stage to build proper habits: accurate records, financial separation, and disciplined compliance.

Once your business crosses the fifty-million-naira mark, FIRS expects a clear compliance history. The discipline you build now will make that transition smooth, credible, and audit-proof.

9. About Baha’s Books

Baha’s Books helps small and growing Nigerian businesses stay compliant with FIRS and state tax authorities. We offer bookkeeping, tax filing, accounting automation, and compliance advisory services tailored to SMEs.

Visit bahasbooks.com to get started or schedule a free consultation with our team.


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