How Nigeria’s tax reforms will cut debt, ease low-income earners

Nigeria’s sweeping tax reforms are expected to slow the mounting debt stock of Africa’s most populous nation and give a breather to low-income earners who have endured the steepest fall in the value of their earnings in more than a decade.

The four landmark bills signed into law by President Bola Tinubu on June 26, 2025, will avail the country at least $7.5 billion annually in untapped tax revenue, according to estimate by experts, sharply reducing the country’s reliance on deficit financing.

Nigeria’s total public debt rose to N149.4 trillion in the first quarter of 2025 with a projection of hitting more than N187 trillion by the end of the year, fanning fears of sustainability amid weak revenues.

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But the tax overhaul could be a “game-changer” as it aims to improve tax revenues as a percentage of gross domestic product from a paltry 10.8 percent— the lowest globally — to 18 percent by 2027, effectively cutting down the need to depend on borrowings for fiscal responsibility.

“Increased tax revenue means Nigeria’s ability to pay back its debts is enhanced and also less possibility of Nigeria accumulating debts subsequently,” Samson Simon, an Abuja-based economic analyst, told BusinessDay.

“National debts balloon as a result of constant deficit spending or deficit budgets. And more revenue means smaller or even the complete disappearance of deficits.”

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For the full year 2024, the nation’s total debt as a percentage of GDP ratio stood at 55 percent. With the recently released debt data for Q1, the ratio now stands at about 65 percent, exceeding the Debt Management Office self-imposed debt ceiling of 40 percent.

“The reform bills, if successfully implemented, could potentially expand the government’s fiscal space and keep Nigeria’s public debt on a sustainable path,” analysts at FBNQuest Merchant Bank wrote in a note on recently.

Till the reforms begin officially in January 2026, the nation’s debt stock, according to the analysts, is expected to continue in its upward trend, especially with further accumulation of debt by the federal government.

Relief in sight for low-income earners

The vulnerable, especially low-income earners, who have seen their salaries hammered by the devaluation of the naira and high inflation are expected to get some respite thanks to the tax overhaul.

Key provisions in the reform framework include a gradual increase in value-added tax (VAT) from 7.5 percent to 12.5 percent by 2026, deliberately exempting low earners from essential goods such as food, basic medicine, sanitary products, and tuition.

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“There’s a clear intention to protect the vulnerable while expanding the tax net,” said Taiwo Oyedele, chairman of the tax reform committee. “For the first time, the focus is not just on how much we collect, but how fairly we do it.”

The reforms also exempt individuals earning N800 thousand or less ($500, £400) per year from income tax and businesses with annual turnover under N100 million and fixed assets not exceeding N250 million from several tax obligations, freeing up disposable income and preserving job creation incentives at the lower end of the economic ladder.

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“For individuals, especially low-income earners, the reforms offer relief through exemptions on wages, essential goods, and job-loss compensation,” the Nigerian Economic Summit Group wrote in its report titled ‘The 2025 Nigerian Tax Reforms Act: Taxing the Fruits not the Seeds’.

According to Samuel Sule, chief executive officer of Renaissance Capital Africa, the lower tax burden on low-income earners coupled with excluded VAT items should come with some ease, especially as Nigerians grapple with its worst cost-of-living crisis in decades.

“In the medium term, a more sustainable debt service and higher government revenue should act as a boost to the domestic economy – all things being equal.”