LIRS directs employers to deduct 10% tax from termination benefits.

THE Lagos Inland Revenue Service, LIRS has directed employers to deduct Capital Gain Tax (CGT) from employee’s termination of service payments, which is 10 percent of the terminal benefits of employees. According to LIRS, such compensations are subjected to taxation in line with section 6(a) of    the CGT Act, although it is exempted from taxation in paragraph 26 of schedule three of Personal Income Tax    (PIT) Act and the compensation will be exempted from Pay As You Earn (PAYE) if the sum was not agreed on or before the disengagement process began. The notice read: “Pre-agreed amounts are generated from employment and subject to PAYE. Gratuity payments are tax deductible for PAYE purposes if they are paid under an approved pension scheme in line with Section 5 of the Pension Reform Act (PRA) 2014.

“If paid outside the PRA, the gratuity payments would be taxable if the conditions under Paragraph 18 of the 3rd Schedule is triggered, i.e. The service period is not up to 10 years; Any amount in excess of N100, 000; and Where the service period is not up to five years (or an aggregate of 63 consecutive months in the case of a service that is not continuous), the exemption allowed is N1, 000 per annum for such period or aggregate period of employment. Any excess calculated does not qualify for the exemption.”


The agency enjoined employers to henceforth, notify the LIRS of payments for compensation in a situation of loss of employment.


“It is no longer acceptable to lump terminal benefits under the heading of compensation for loss of employment. Employers are required to show each pay component and the corresponding payments in their tax returns to enable the LIRS determine the correct tax treatment,” its stated…

Source: Vanguard