1. What is Withholding Tax (Deduction of Tax at source)?
Withholding Tax (WHT) is an advance payment of income tax.
It is deducted at the point where payment is made, and later credited to the taxpayer’s annual tax return.
Example:
If you render a service and the fee is ₦100,000.00 (One Hundred Thousand Naira) the payer may deduct 5% (₦5,000) as WHT and remit it to government on your behalf.
2. What Has Changed Under the 2025 Law?
a. Stricter Enforcement and Digital Remittance
WHT must now be remitted online within the statutory period. Failure attracts automatic penalties.
b. Wider Coverage
More transactions are now subject to WHT, including:
- Consultancy
- Professional fees
- Commission and agency services
- Rent (residential and commercial)
- Construction
- Supply of goods and raw materials
c. Proof of Remittance Required
Businesses must now issue:
- WHT credit notes
- e-receipts
- Digital WHT certificates
These certificates must match the taxpayer’s TIN.
3. Why WHT is Important
WHT helps the government collect tax in advance and also helps individuals settle part of their annual PIT liability automatically.
4. Common WHT Rates under the 2025 Law
The rates vary depending on the nature of transaction:
- Rent: 10% (commercial), 10% (residential in some states)
- Professional/consultancy fees: 10%
- Contracts: 5% or 10% depending on the payer
- Commission/agency fees: 10%
- Construction: 5%
- Supplies: 5%
5. Who Should Deduct Withholding Tax?
The following must deduct WHT anytime they make relevant payments:
- Companies
- Government agencies
- Ministries and parastatals
- NGOs
- Businesses
- Landlords receiving rent
- Individuals paying for professional services
6. How WHT Works in Practice
Step 1: A payment is made for a service or rent
Step 2: The payer deducts the WHT percentage
Step 3: The payer remits the WHT to government
Step 4: The taxpayer receives a WHT credit certificate
Step 5: The taxpayer uses the certificate to reduce annual PIT or CIT
7. Problems WHT Helps to Solve
- Reduces tax evasion
- Ensures traceable financial transactions
- Provides advance tax credit for taxpayers
- Improves national revenue collection
Here is what every business owner and vendor needs to know.
i. Small Businesses are Now Exempt
This is the headline news: Small Companies are exempt from Withholding Tax.
- The Rule: If your annual turnover is ₦100 Million or less, big companies are not required to deduct WHT from your invoices.
- The Condition: You must have a valid Tax Identification Number (TIN).
- The Benefit: You get paid your full invoice amount, improving your cash flow significantly.
II. Lower Rates for “Low Margin” Business
The government recognized that businesses with slim profit margins (like traders producing goods) were being over-taxed by the old rates. The rates have been slashed to reflect reality:
- General Services: Reduced to 2% (previously 5% or 10%).
- Catering, Construction & Agency: Reduced to 2%.
- Technical/Management Fees: Reduced to 5% for residents.
III. Manufactures and Farmers are Protected
To support local production, the new regulations specifically exempt producers and manufacturers from WHT on goods they produce.
- Example: If you manufacture shoes and sell them to a distributor, the distributor should NOT deduct WHT from your payment.
- Farmers: Agricultural produce is also largely exempt to encourage food security.
IV. Clarity on “Out-of-Pocket” Expenses
Previously, WHT was often charged on the total invoice value, including logistics and reimbursable expenses.
New Rule: WHT applies only to the income/fee portion of the transaction, not on out-of-pocket expenses (provided they are clearly separated on the invoice).
V. Penalties for non-compliance
Late filing: ₦100,000.00 (One Hundred Thousand Naira) fine for the first month ₦50,000.00 (Fifty Thousand Naira) for each extra month.
Awarding contracts to unregistered vendors: a ₦5 million penalty .
These penalties are designed to keep the system tidy and ensure the revenue service gets its share promptly.
8. What Businesses and Individuals Must Do Under the 2025 Law
- Always request a WHT certificate after any deduction
- Keep proper accounting records
- Match WHT certificates with your TIN
- Use WHT credits to reduce your annual tax
- File returns electronically
CONCLUSION
The new 2025 Withholding Tax system is built around digital compliance, accountability, and wider coverage. Understanding how WHT works helps individuals and businesses avoid penalties and enjoy smooth tax clearance processing.