How Nigeria's 2025 Tax Reforms Affect SMEs and Startups: Here's All You Should Know (And Do Now)

The 2025 Tax Reforms introduce some of the most significant tax reliefs Nigerian small businesses have seen in recent years. 

By expanding the definition of a small company, increasing tax exemption thresholds, and simplifying aspects of tax compliance, the reforms are designed to help Startups and SMEs retain more of their earnings and focus on growth.

One of the most notable changes is the removal of the medium-sized company category. Under the previous tax regime, businesses with annual turnover between ₦25 million and ₦100 million were classified as medium-sized companies and remained subject to several tax obligations. Under the new framework, many of these businesses now qualify as small companies and can benefit from substantial tax exemptions.

For entrepreneurs, startups, and growing SMEs, these Acts create opportunities to reduce tax costs, improve cash flow, and formalise operations with fewer compliance burdens. 

Let's look at these key changes and how they affect your business from January 1, 2026:

1. Zero Company Income Tax for Small Businesses

Prior to the new tax reforms, small companies or businesses were defined as those with annual revenue of ₦25 million or below. Medium companies turned over ₦25 million to ₦100 million, while large companies had a turnover above ₦100 million.

The Reform overhauled these definitions. Now, “small company” status applies to businesses with a turnover of ₦100 million or less and fixed assets of up to ₦250 million. 

However, companies with annual revenue just above the ₦100 million threshold will now incur full tax liability, without the transitional “medium” buffer that previously existed. 

This expansion provides small businesses with complete relief from:

• Company Income Tax (CIT)
• Capital Gains Tax (CGT)
• The new 4% Development Levy

This is a game-changer for SMEs. Many small business owners previously avoided formal business registrations for fear of tax liabilities that felt disproportionate to their earnings. Now, the system rewards early registration and allows breathing space to reinvest profits instead of losing them to compliance costs.

Need the highlights?

Download the 2026 SME Tax Guide (PDF) and keep it for future reference

2. Relief from Minimum Tax for Former Medium-Sized Businesses

With the expansion of the small company threshold to ₦100 million, many businesses that were previously classified as medium-sized companies now qualify as small companies and are exempt from Company Income Tax. As a result, they are also no longer subject to minimum tax requirements.

For businesses that were already classified as small companies, this exemption remains unchanged. However, for thousands of growing SMEs that previously fell within the medium-sized category, the Act provides significant relief by removing the risk of paying tax during periods of low profitability or temporary losses.

This allows businesses to preserve cash flow, reinvest earnings, and focus on growth rather than meeting tax obligations when profits have not yet materialised.

3. Withholding Tax Relief for Micro-Transactions

The law now exempts low-value payments, specifically those below ₦2 million, from Withholding Tax (WHT), provided the receiving business has a valid Tax Identification Number (TIN). 

This is particularly beneficial for small businesses (with annual earnings of under ₦100 million). It allows them to receive full payment on small contracts without experiencing cash flow delays or navigating the burdensome process of recovering WHT credits.

4. Encouragement to Register & Formalize

Fewer taxes and simpler rules mean fewer reasons to stay informal. Registration now opens the door to:

• Easier access to credit
• Government and donor grants
• Corporate partnerships
• Business legitimacy

Rather than being penalized for coming forward, small businesses now stand to gain financially and strategically by being compliant.

5. Input VAT Recovery for Growth-Focused Startups

Startups and businesses making taxable sales can now recover VAT on nearly all business related expenses, including capital acquisitions (fixed assets purchases). This is especially helpful for tech and manufacturing businesses and startups that incur high setup costs. 

6. Digitalization Makes Compliance Easier

The mandatory rollout of e-invoicing and VAT fiscalisation puts everyone (big or small) on a level playing field. For SMEs, this means:

• Fewer errors in tax filing
• More accurate records
• Less risk of penalties due to manual mistakes

As implementation progresses, SMEs should expect greater automation in record-keeping, VAT compliance, and tax reporting.

7. Simplified Incentives Over Tax Holidays

The removal of the Pioneer Status incentive and its replacement with a 5% Economic Development Incentive makes tax benefits more accessible to genuinely productive startups & SMEs. 

Rather than chasing tax holidays, companies can now earn ongoing tax credits for real investments in capital and innovation.

8. Reduced Personal Income Tax Burden

Founders and employees earning ₦800,000 or less annually are now exempt from personal income tax. This protects early-stage entrepreneurs who are still bootstrapping their businesses. 

Now you can focus on growing your business without taxes eating into your already limited finances. 

What SMEs Should Do Right Now

To fully benefit from the new tax reforms, SMEs and startups should take proactive steps to position themselves for compliance and growth. Businesses should consider:

• Obtaining and maintaining a valid Tax Identification Number (TIN).
• Monitoring annual turnover and asset levels to determine whether they qualify for small company status.
• Maintaining proper accounting records and supporting documentation.
• Reviewing opportunities to recover eligible input VAT on business expenses and capital investments.
• Preparing for the gradual implementation of e-invoicing and other digital tax compliance requirements.
• Assessing eligibility for available tax incentives, including the Economic Development Incentive where applicable.
• Seeking professional tax advice before crossing the ₦100 million turnover threshold to understand the implications of moving into the standard tax bracket.

The reforms create significant opportunities for small businesses, but maximizing those benefits requires proper planning, record-keeping, and compliance. Businesses that prepare early will be better positioned to reduce tax risks, improve access to financing, and support sustainable growth.

Final Thoughts

Historically, many SMEs viewed the tax system as complex, costly, and burdensome. However, these reforms are a much-needed breath of fresh air. For SMEs and startups, this is the best time in recent history to register, scale, and benefit from the system.

What many businesses perceived as a system that discouraged formalization and growth is now beginning to reward effort, innovation, and formality. The Nigerian business environment is evolving, and savvy entrepreneurs should adapt to it as quickly as they can.

Do you want a complete overview of all changes affecting individuals, corporates, and investors? Read our comprehensive guide: The 2025 Nigerian Tax Reform Acts Explained.

Work with us 

At Bakertilly Nigeria, we work with startups, SMEs, and established companies to help them:

✓ Understand how the new tax acts apply to their business

✓ Register their operations correctly

✓ Remain compliant while maximizing their tax benefits

✓ Develop sound financial and tax strategies for long-term growth

If you’ve been waiting for the “right time” to formalize or grow your business, this is it. Let our experts guide you through every step, from registration to tax advisory services and ongoing compliance. 

Download the SME Tax Guide | Book a Consultation Today