Table of Contents

CAPITAL ALLOWANCE COMPUTATION BURNDOWN

Introduction

Capital allowance is a tax relief granted to companies for the wear and tear, depreciation, or obsolescence of qualifying assets used in a trade or business. For decades, Nigerian companies navigated a complex capital allowance regime involving initial allowances, annual allowances, and intricate restrictions. That era ended on 1 January 2026. The Nigeria Tax Act (NTA) 2025 fundamentally reset the rules, introducing a simpler but more compliance-driven framework .

The shift is slowing the pace at which companies recover tax relief on capital expenditure, as deductions are now spread over a longer period rather than granted upfront . This has significant implications for cash flow and liquidity planning—particularly for capital-intensive sectors like manufacturing, oil and gas, telecommunications, mining, and agriculture .

This guide provides a comprehensive burndown of the capital allowance computation process under the NTA 2025, covering key changes, rates, transitional rules, and practical steps for compliance.

The Pain Points: Why the New Capital Allowance Regime Matters

The Shift from Accelerated to Uniform Relief

Under the old regime, companies could claim an initial allowance upfront (typically 50% for plant and machinery) plus annual allowances. The NTA 2025 has abolished initial allowances entirely . Deductions are now spread over a longer period, increasing pressure on early-year cash flows for firms with significant investments in machinery and infrastructure.

According to Professor Olusegun Vincent of Pan-Atlantic University, “Instead of claiming a large allowance in year one, companies must now spread the deduction equally over the useful life of the asset. So the impact is more of a timing difference than an actual removal” .

The VAT/Import Duty Compliance Nexus

A crucial new condition: capital allowances can only be claimed on assets where VAT or import duties have been duly paid . Section 27(2) of the NTA provides that only capital expenditure on which VAT or import levies have been paid will qualify for capital allowances, tightening eligibility for deductible assets . Any capital expenditure on which VAT or import duties has not been paid is excluded from the cost of the asset used in arriving at capital allowances .

The Transitional Complexity

For companies with existing assets, the transition is not a reset. The remaining useful life of the asset is recalculated by deducting the years already claimed from the total allowable period under the new regime . Taxpayers are only entitled to the remaining number of years required to complete the cycle under the NTA . Companies that have already begun claiming capital allowances under the Companies Income Tax Act (CITA) are not required to restart their computation .

The Proration Threshold Change

The proration threshold has been lowered from 20% to 10%. Capital allowance must now be prorated where non-taxable income constitutes 10% or more of a company’s total income . This means more companies will be required to prorate their capital allowance claims.

Key Changes Under the NTA 2025

Change	Old Regime	New Regime
Method	Initial + Annual allowances	Straight-line only
Rates	Multiple rates with complex categories	10%, 20%, 25% only
2/3 Restriction	Restricted to ⅔ of assessable profit	Removed; full claim allowed
Carryforward	Could be restricted	Unlimited carryforward
VAT Nexus	Not required	Must have paid VAT/import duty
Proration Rule	>20% non-taxable income	≥10% non-taxable income
Notional Retention	₦10	1% of asset cost

Capital Allowance Rates Under the NTA 2025

All assets now fall into one of three annual rates :

Class	Qualifying Expenditure	Rate
1	Building expenditure	10%
1	Agricultural expenditure	10%
1	Mast expenditure	10%
1	Intangible assets expenditure	10%
1	Heavy transportation expenditure	10%
2	Plant expenditure	20%
2	Agricultural equipment expenditure	20%
2	Furniture and fittings expenditure	20%
2	Mining expenditure	20%
2	Other equipment expenditure	20%
3	Motor vehicle expenditure	25%
3	Software expenditure	25%
3	Other capital expenditure	25%

Step-by-Step Capital Allowance Computation

Step 1: Determine Qualifying Capital Expenditure

Identify all capital expenditure incurred on assets used for generating taxable income . Assets are only eligible where:

The company incurred qualifying capital expenditure in the basis period
The claimant remains the beneficial owner of the asset at the end of the basis period
The asset is used wholly and exclusively for the trade or business
VAT or import duties on the asset have been paid

Step 2: Classify the Asset

Classify each asset into the appropriate rate class (10%, 20%, or 25%) based on the rate table above.

Step 3: Calculate the Annual Allowance

Apply the straight-line rate to the qualifying cost of the asset:

Annual Allowance = Qualifying Cost × Applicable Rate

Step 4: Apply Proration (If Required)

Capital allowances must be prorated where the asset is partially used in generating taxable income . However, proration is not required where non-taxable income is less than 10% of total income. The proration formula is:

Allowable Capital Allowance = Available Allowance × (Taxable Income ÷ Total Gross Income)

Step 5: Apply Transitional Rules

For assets on which capital allowances were granted prior to the commencement of the NTA:

Deduct the number of years already claimed from the total allowable period under the new regime
If allowances already claimed equal or exceed the allowable period, only a singular residual allowance is granted (subject to 1% retention)
The 66⅔% restriction on capital allowance utilisation has been removed, allowing full utilisation where sufficient taxable profits exist

Step 6: Apply Unutilised Allowances

Unutilised capital allowances can now be carried forward indefinitely until fully utilised .

Practical Examples

Example 1: Standard Computation

Scenario: A company acquires plant and machinery for ₦100 million in 2026.

Applicable rate: 20% (plant expenditure)
Annual allowance: ₦100m × 20% = ₦20m
Non-taxable income: 15% of total income
Claimable allowance: ₦20m × 85% = ₦17m

If assessable profit is less than ₦17m, the balance can be carried forward until fully used.

Example 2: Proration Calculation

Scenario: Fast Energy Ltd (2026 Tax Year)

Income Breakdown:

Taxable Income: ₦90,000,000
Non-Taxable Income: ₦15,000,000 (e.g. interest on govt bonds, grants)
Total Gross Income: ₦105,000,000
Available Capital Allowance: ₦40,000,000

Step 1: Check the 10% Threshold
Non-Taxable % = (₦15m ÷ ₦105m) × 100 = 14.29%

Since non-taxable income exceeds 10%, proration is required.

Step 2: Calculate Allowable Capital Allowance
Allowable CA = ₦40m × (₦90m ÷ ₦105m) = ₦34.29 million

Unutilized ₦5.71 million is carried forward indefinitely .

Example 3: Complex Assets – Component Accounting

Scenario: A billboard costing ₦85,000,000 to install .

Component Split:

Steel/Iron stand: ₦55,000,000 (Useful life: 20 years)
Digital LED screen: ₦30,000,000 (Useful life: 5 years)

Annual Depreciation (Straight-Line):

Steel Stand: ₦55,000,000 ÷ 20 years = ₦2,750,000 per year
LED Screen: ₦30,000,000 ÷ 5 years = ₦6,000,000 per year
Total = ₦8,750,000 per year

Incorrect Treatment (entire asset over 20 years):

₦85,000,000 ÷ 20 = ₦4,250,000 per year

Difference: ₦4,500,000 annual difference .

For tax purposes, depreciation is added back, and capital allowance depends on proper asset classification. The steel structure typically attracts a lower capital allowance rate, while the LED screen attracts a higher rate. If bundled together, you risk under-claiming, over-claiming, or creating audit exposure .

Transitional Rules

For Existing Assets

Companies that have already begun claiming capital allowances under the Companies Income Tax Act (CITA) are not required to restart their computation. The remaining useful life is recalculated by deducting the years already claimed from the total allowable period under the new regime .

For Assets Fully Written Off

Where capital allowances on assets were fully claimed under the previous regime, no additional allowance shall be granted under the NTA with respect to amounts retained in accordance with the repealed provisions .

For Small Companies

Capital allowances are not allowable or carried forward for small companies. They can only claim capital allowances when they cross the threshold and qualify as medium or large companies.

The 1% Notional Retention

Companies must retain 1% of the asset’s cost in the books until disposal. This amount does not increase or reduce the capital allowance claimable on the asset .

Industry Impact

Manufacturing Sector

The manufacturing sector, one of the most capital-intensive segments of the economy, faces significant pressure. Nominal GDP growth in the sector stood at 5.80% in Q4 2025, down significantly from 13.14% in the corresponding period of 2024 . The new capital allowance timing compounds the pressure by delaying tax relief precisely when sector margins are already compressed.

Telecommunications Sector

Telecom operators expanding broadband, fibre, and data infrastructure will now face higher tax liabilities in the period of acquisition. The Nigerian telecommunications industry recorded N2.9 trillion in capital expenditure in 2024—a 159% increase from the previous year .

Other Capital-Intensive Sectors

Industries such as oil and gas, mining, and agriculture rely heavily on machinery, industrial equipment, network infrastructure, rigs, and processing facilities. With the initial allowance abolished, these investors face higher taxable profits in the first year and reduced cash flow at the point of capital deployment .

How Qeeva Advisory Helps with Capital Allowance Compliance

At Qeeva Advisory, we understand that navigating the new capital allowance regime under the NTA 2025 can be complex. Our team of experienced professionals helps Nigerian businesses recompute their capital allowances and ensure compliance.

Our Core Services

Advisory Services Nigeria – Our advisory professionals help you understand the new capital allowance rules, recompute existing assets, and develop tax strategies. Our professionals specialise in investments, financials, taxation, corporate advice, acquisitions, and valuations .

Tax Strategies and Planning – We help you structure your asset acquisitions to optimise capital allowance claims and manage cash flow. For businesses in priority sectors, we help you navigate the CAFA requirements and claim the 5% Economic Development Tax Incentive (EDTI) .

Regulatory Compliance – We ensure your capital allowance computations meet all regulatory requirements under the NTA 2025. Compliance is not just a legal requirement—it is a business strategy that fosters stability, trust, and growth .

Bookkeeping Services – Accurate fixed asset registers are essential. Our bookkeeping services ensure your asset records are complete and compliant. Proper asset registers are not optional—they are essential for audit survival .

Risk Management – We help you identify, quantify, and proactively manage risks across regulatory compliance, fraud prevention, and tax governance. We help you stay audit-ready .

Frequently Asked Questions

Q: What is the capital allowance rate under the NTA 2025?
A: The NTA 2025 classifies assets into three tiers: 25%, 20%, and 10% per annum on a straight-line basis, with a 1% residual value in the final year. The specific rate depends on the type of asset and how it is used in your business .

Q: Can I still claim initial allowance?
A: No. The initial allowance has been eliminated. Capital allowances are now computed on a straight-line basis only .

Q: What happens if I haven’t paid VAT on an asset?
A: Capital allowances can only be claimed on assets where VAT or import duties have been duly paid. Expenditure without proof of VAT/import duty payment is excluded from the asset cost .

Q: What is the proration rule for capital allowances?
A: Allowances must be prorated where the asset is partially used for taxable income. However, proration is waived where non-taxable income is less than 10% of total income .

Q: Can unutilised capital allowances be carried forward?
A: Yes. Unused allowances can now be carried forward indefinitely until fully utilised .

Q: What is the 1% notional retention?
A: Companies must retain 1% of the asset’s cost in the books until disposal. This amount does not increase or reduce the capital allowance claimable on the asset .

Q: What is CAFA and why do I need it?
A: CAFA stands for Certificate of Acceptance of Fixed Assets. It is issued by the Industrial Inspectorate Department of the Federal Ministry of Industry, Trade and Investment and is mandatory for claiming capital allowances in priority sectors under Section 27(2)(a) of the NTA .

Q: How does component accounting affect capital allowance?
A: Assets with components that have significantly different useful lives must be recognised and depreciated separately. This ensures correct capital allowance rates are applied to each component and avoids under-claiming or over-claiming .

The Bottom Line

The NTA 2025 has fundamentally changed how capital allowances are computed in Nigeria. While the new system simplifies compliance with uniform rates and removes the 66⅔% restriction, it also imposes stricter conditions and alters the timing of tax relief recovery.

Key Takeaways:

Reconfigure Fixed Asset Registers: Update registers to reflect straight-line rates (10%, 20%, or 25%) based on asset classification .

Keep Evidence of VAT/Import Duty: Maintain proper documentation for every asset purchase to support capital allowance claims .

Check Income Mix: If non-taxable income exceeds 10%, allowances must be prorated .

Review Transitional Rules: For existing assets, deduct years already claimed from the total allowable period .

Plan for Cash Flow Impact: The shift from accelerated to uniform relief affects liquidity planning, particularly for capital-intensive investments .

Understand Component Accounting: Assets with components of significantly different useful lives must be accounted for separately to avoid under-claiming or over-claiming .

Your job is to be prepared. Understand the new capital allowance rules. Reconfigure your fixed asset registers. Maintain proper documentation. Seek professional guidance.

With the right approach and the right partner, you can turn capital allowance compliance from a tax burden into a predictable and manageable part of your tax planning.

Reference Links / Sources

Qeeva Advisory – Capital Allowance Under the Nigeria Tax Act 2025 – Comprehensive guide including rates, CAFA requirements, EDTI claims, and service methodology

LinkedIn – Changes to Capital Allowance Computation in NTA 2025 – Summary of key changes including straight-line method, VAT nexus, and 1% retention

PwC – Nigeria Corporate Deductions – Comprehensive capital allowance rates table, transitional rules, and VAT/import duty nexus requirements

BusinessDay – New tax act slows capital allowance relief timing – Analysis of cash flow impact, transitional rules, and compliance requirements

BusinessDay – NTA 2025 shifts the tax goalposts for capital-intensive investors – Analysis of sectoral effects and expert commentary on the removal of initial allowance

LinkedIn – Nigeria’s Tax Act 2025: Simplified Capital Allowances – Key changes summary including straight-line method, VAT nexus, 1% retention, and worked example

SmartSMSSolutions – Capital Allowance for Vehicles & Equipment in Nigeria – Component accounting principles, asset register requirements, and audit-ready practices

BusinessDay – New tax act slows capital allowance relief timing (full) – Expert commentary on transitional provisions and sectoral impact

ICAN Study Text – Taxation 2025 – Worked examples and computation procedures

Qeeva Advisory – Tax Consulting Tax Planning – Tax planning and management services

Qeeva Advisory – Regulatory Compliance Service – Integrated compliance services

Let’s Talk About Your Capital Allowance Needs

Navigating the new capital allowance regime under the NTA 2025 can be complex. At Qeeva Advisory, we understand the challenges faced by Nigerian businesses in recomputing capital allowances and ensuring compliance.

Whether you need help with capital allowance computation, tax planning, or compliance support, we are here to support you.

📞 Call us: (+234) 802 320 0801, (+234) 807 576 5799

📧 Email: info@qeeva.com

📍 Visit us: 5, Ishola Bello Close, Off Iyalla Street, Alausa, Ikeja, Lagos, Nigeria

Contact us today to schedule a consultation. Let us help you navigate capital allowance compliance with confidence.

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