In the determination of the income of an individual assessable to tax, certain expenses, as stipulated in the Personal Income Tax Act (PITA) 2011 as amended (the Act), are allowable as deductions.
Section 33 (4)(d) of the Act allows as a deduction, the annual amount of any insurance premium paid by an individual in respect of his life or that of his spouse, or premium paid for a deferred annuity contract on his own life or his spouse’s. However, the Act restricted the claim of such premium deductions to the premium paid during the year preceding the year of assessment, but did not specify further guidance as to how the ‘savings element’ that usually forms part of the whole life insurance contracts (and premiums paid), should be treated.
The Lagos State Internal Revenue Service (LIRS), in one of its recent Public Notices (click to download), has provided clarifications on deductible life insurance or deferred annuity premiums, treatment of the ‘savings element’ and the consequent filing obligations.
Please note that ‘Term Life Insurance’ contract premiums usually consist strictly of the cost of protection only (that is, face value of the insurance cover, financed by determined premiums), while ‘Whole Life Insurance’ contract premiums usually include the cost of protection, and a ‘savings element’ that reduces the cost of protection over time, while still ensuring that the face value of the insurance cover remains static.
Most employers in Nigeria only go for ‘term group life insurance’, that is, group life insurance contracts for employees, renewable after a specified period of time, mostly yearly. The premium paid on such group life insurance by most employers is purely the cost of protection and does not include any savings element.
The ‘savings element’ mostly come into play on personal ‘whole life’ or ‘deferred annuity’ insurance contracts taken up by individuals on their own accord.
In the Notice, LIRS emphasizes that in a life insurance or deferred annuity contract,it is only the element of the premium [which represents the cost of protection (and not the savings element)], that is deductible for the purpose of determining taxable incomes. Also, LIRS states the following as the necessary criteria for tax deductibility of the premium (cost of protection):
- It must include a cover for the death of the insured or their spouse; or
- It must not include or anticipate a payment to the insured before the age of 50, i.e. for a deferred annuity contract.
Furthermore, LIRS posits that premiums paid with respect to deferred annuity contracts are tax deductible onlywhere the holder has no control over the funds. That is, where the amount is locked into the scheme until the person’s retirement age.
LIRS has therefore delegated more filing obligations to taxpayers/ employers who intend to enjoy tax relief on premiums paid, as follows:
- Submit annual form A (Claims for Allowances and Relief) for each relevant tax year detailing the life insurance and qualifying deferred annuity contributions; and
- Submit a certificate obtained from the relevant Life Assurance company which shows separately the premium relating to the death policy and that relating to any savings scheme.
Given that most employers only take group life cover for their employees (mostly necessitated by the provisions of the Pensions Reform Act), and premiums paid mostly include only the cost of protection and no savings element;
- The liability for employers to account for the ‘savings element’ on the group life insurance cover for their employees may never arise.
- Only employers who welcome the submission of premiums paid by individual employees on their personal life insurance contracts, for processing on the company’s payroll, may be liable LIRS’ compliance/ reporting obligations.
- Individual taxpayers (whether self-employed or employed by others), who take personal life insurance covers containing savings element, and claim tax deductions for premiums paid (either directly or through their employers) are liable to the compliance obligations set out in this Public Notice.
Individual taxpayers who do not wish to claim any tax deductions on the life insurance premiums paid, need not worry about the reporting obligations.
For Your Convenience
Here is a quick reminder of some of the recent filing obligations required of taxpayers/ employers by LIRS in its recent Public Notices:
- Individuals claiming tax relief on voluntary pension contributions must render, annually, alongside their income tax return, a copy of their RSA statements for the relevant tax year;
- Employers are to file, alongside their annual returns (Form H1), a schedule showing the information on their employee loan and the payment terms;
- Employers are to disclose the details of any accommodation provided to employees (to be discussed in a subsequent newsletter); and
- Employers are to file, alongside their annual returns, a schedule showing the information on its employees share options (This will be discussed in our subsequent newsletter).