A company buys a ₦20 million delivery truck. Depreciation is not deductible, yet the tax system still gives relief for the money spent. That relief is the capital allowance, and in 2026 its design changed: the initial allowance, the investment allowance and the balancing adjustments disappeared, and the allowance is now a straight-line deduction over the tax life of the asset.
The exam may test either regime, so you must know both and know which applies.
This topic covers capital allowances under the Second Schedule to the Companies Income Tax Act (CITA) for years to 2025 and under the First Schedule to the Nigeria Tax Act (NTA) 2025 from 2026: types, rates, qualifying expenditure, conditions, restrictions, hire purchase, small companies, balancing adjustments and the transition. The previous topic covered loss relief; capital allowances are deducted after it. The next covers chargeable gains.
The March/July 2020 Pathfinder (Question 2) computed initial, annual and investment allowances under CITA and restricted them to 66⅔% of assessable profit, so our NTA answers differ from that solution.
In 30 seconds
CITA (to 2025):
- initial allowance in the first year (for example 50% plant and motor vehicles, 15% buildings, 25% furniture), then annual allowance on the balance (25%, 10%, 20%)
- investment allowance of 10% ended on 31 August 2023
- balancing allowance or charge on disposal
- total claim capped at 66⅔% of assessable profit (not for agro-allied and manufacturing)
NTA 2025 (from 2026):
- no initial allowance, no investment allowance, no balancing adjustments, no 66⅔% cap. Annual allowance is straight line over the tax life: Class 1, 10% (buildings, agricultural, mast, intangible, heavy transport)
- Class 2, 20% (plant, agricultural equipment, furniture and fittings, mining, other equipment)
- Class 3, 25% (motor vehicles, software, other)
Pro-rate for a short basis period. Record 1% of cost as a notional residue. Small companies get no capital allowances.
Key terms in plain English
| Term | What it means |
|---|---|
| Qualifying capital expenditure (QCE) | Spending on an asset used in the trade that earns capital allowances |
| Initial allowance | A first-year allowance under CITA; abolished by the NTA 2025 |
| Annual allowance | A yearly allowance on cost (NTA) or on cost after initial allowance (CITA) |
| Tax written down value (TWDV) | Cost less allowances given |
| Balancing allowance or charge | Adjustment on disposal under CITA when proceeds are below or above TWDV |
| Investment allowance | 10% extra allowance under CITA, repealed from 1 September 2023 |
| Notional residue | 1% of cost kept on the schedule under the NTA; it does not change the allowance |
Syllabus check
This topic is in syllabus area B (taxation of companies and investment income, 35% of marks). It covers:
- qualifying capital expenditure and the types of capital allowance;
- rates, restrictions and conditions for the allowances;
- assets acquired on hire purchase or finance lease, commencement, cessation and small companies;
- the changes made by the Finance Acts and the Nigeria Tax Act 2025.
CAMA 2020 and capital allowances
The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.
| Section | What it says | Link to this topic |
|---|---|---|
| s. 377(1) and s. 378 | Directors prepare financial statements that give a true and fair view | The fixed asset register behind the allowance schedule comes from these records |
| s. 305 and s. 308 | Directors must act in good faith, with the care, diligence and skill of a reasonably prudent director | Directors must claim the allowances the law permits and no more |
| s. 222 | A charge created by a company must be registered with the Corporate Affairs Commission | Assets bought with secured finance still qualify if the company is the owner |
The rules in more depth
Why capital allowances exist
Depreciation is a matter of accounting choice, so it would give different relief to similar assets. Capital allowances use the same rates for everyone and are granted instead of depreciation, which is disallowed. An item allowed as a revenue expense cannot also be qualifying capital expenditure.
CITA: rates and rules (to 31 December 2025)
| Asset | Initial % | Annual % |
|---|---|---|
| Buildings (industrial and non-industrial) | 15 | 10 |
| Mining; agricultural plant; public transport vehicles; plantation equipment; research and development | 95 | Nil |
| Plant and machinery (other); motor vehicles (other); housing estate | 50 | 25 |
| Furniture and fittings | 25 | 20 |
| Ranching and plantation | 30 | 50 |
- Initial allowance is given in full in the first year, new or second-hand (a second-hand building gets annual allowance only).
- Annual allowance = (cost − initial allowance) ÷ remaining years, and is the same each year; ₦10 per item is kept until disposal. It is pro-rated for a basis period under 12 months.
- Balancing allowance if proceeds are below TWDV; balancing charge if above, limited to allowances previously given.
- The claim is capped at 66⅔% of assessable profit, except for agro-allied and manufacturing companies. Unrelieved allowances carry forward without time limit. Unused allowances at cessation carry back up to five years.
- A one-off 95% allowance applies to plant replacing old plant, and downstream gas companies get accelerated allowances after a three-year tax-free period.
- Land is never qualifying expenditure; remove its cost from the cost of a building.
NTA 2025: rates and rules (from 1 January 2026)
| Class | Rate | Qualifying expenditure |
|---|---|---|
| 1 | 10% | Buildings, agricultural expenditure, masts, intangible assets, heavy transportation (aircraft, vessels, pipelines, trains) |
| 2 | 20% | Plant, agricultural equipment, furniture and fittings, mining expenditure, other equipment |
| 3 | 25% | Motor vehicles, software, other capital expenditure |
Qualifying expenditure covers acquisition, refurbishment and improvement, including all costs to bring the asset to first use. The allowance is straight line: cost × rate for each year of the tax life (a 25% asset lasts four years). The tax life of a building is ten years.
The 66⅔% cap is gone, so allowances are limited only when there is not enough assessable profit, when there is private use (restrict to business use), or when the basis period is under 12 months (prorate). The basis period for allowances follows the profit basis period.
Conditions for the allowance (NTA)
- The company owns the asset at the end of the basis period.
- The asset is used for the trade or business.
- Priority-sector companies hold a certificate of acceptance from the Industrial Inspectorate Department.
- VAT and import duty or levy on the asset have been paid.
- If an asset earns both taxable and non-taxable income, the allowance is prorated when non-taxable income is 10% or more of total income, and not prorated when it is below 10%.
- Allowances on priority activities of a company with an economic development incentive are set only against that business’s profit.
- No allowance if the cost is allowed as a revenue expense.
- No allowance on the excess cost of an asset paid for with foreign currency bought above the official rate.
Hire purchase and finance lease
Qualifying expenditure is the instalments paid up to the basis period, excluding interest, and the hirer or lessee is treated as the owner. The lessor gets no allowance. Under CITA each payment in a basis period is treated as a new unit of cost, with the years already used deducted from the remaining life.
Small companies
Capital allowances, including unabsorbed allowances, are not claimed by small companies. Under the Finance Act 2021 they were deemed used each year. The NTA 2025 gives small companies (turnover ≤ ₦100m, fixed assets ≤ ₦250m) no allowances.
Transition to the NTA
For assets already receiving allowances before 2026:
- the remaining years equal the NTA life less the years already claimed
- if the years already claimed equal or exceed the NTA life, one final allowance is given for the residue
- if the asset has been fully allowed under CITA, the amount retained in the books gets no further allowance
Keep 1% of cost as a notional residue.
Worked examples
Example 1: NTA straight line. A company buys a motor vehicle for ₦20,000,000 on 1 February 2026. Its year-end is 31 December.
- The vehicle is in use at the end of the 2026 basis period, so the first allowance is in the 2027 year of assessment.
- Class 3, 25%: 20,000,000 × 25% = ₦5,000,000 a year for four years.
- Notional residue.
1% × 20,000,000 = ₦200,000, for the schedule only.
Example 2: short period. A company starts on 1 July 2026 with a vehicle costing ₦50,000,000 and a 31 December year-end.
- Full-year allowance.
50,000,000 × 25% = ₦12,500,000. - The basis period is six months, so pro-rate.
12,500,000 × 6 ÷ 12 = ₦6,250,000 in the 2027 year.
Example 3: CITA, initial and annual. Plant costing ₦8,000,000 is bought in a CITA year.
- Initial allowance 50% = ₦4,000,000; balance ₦4,000,000.
- Annual allowance.
balance ÷ years = 4,000,000 ÷ 4 = ₦1,000,000, which equals 25% of the balance, each year. - Year 1 total = ₦5,000,000; TWDV ₦3,000,000.
Example 4: balancing charge under CITA. A vehicle that cost ₦1,500,000 (initial allowance ₦750,000 and one annual allowance of ₦375,000 taken) is sold for ₦2,000,000.
- TWDV = 1,500,000 − 750,000 − 375,000 = ₦375,000.
- Surplus = 2,000,000 − 375,000 = ₦1,625,000.
- Charge is limited to allowances given.
1,500,000 − 375,000 = ₦1,125,000.
Example 5: hire purchase. A machine has a cash price of ₦5,600,000. Deposit ₦2,000,000 and 24 instalments of ₦200,000 are paid.
- Total paid.
2,000,000 + 4,800,000 = ₦6,800,000. - Interest = 6,800,000 − 5,600,000 = ₦1,200,000, or ₦50,000 per instalment.
- Qualifying expenditure per instalment = ₦150,000; interest is not included.
How to score full marks
- Fix the regime first: year of assessment to 2025 or from 2026.
- Show the schedule: cost, allowance, TWDV, carried forward.
- Time the claim: asset in use at the end of the basis period.
- Pro-rate for short periods and private use.
- Remove interest from hire purchase payments and land from building cost.
- Deduct the allowance after loss relief and apply the 66⅔% cap only under CITA.
Common mistakes in the exam
- Giving an initial allowance on an asset bought in 2026 or later.
- Applying the 66⅔% cap under the NTA.
- Giving a balancing charge or allowance under the NTA.
- Including hire purchase interest in cost.
- Forgetting to prorate a short basis period.
- Giving allowances to a small company.
Quick revision
- CITA: initial + annual + investment (to Aug 2023) + balancing; 66⅔% cap.
- NTA: straight line 10%, 20%, 25%; no initial, investment or balancing; no cap.
- Keep 1% notional residue; prorate short periods.
- Hire purchase: instalments without interest; hirer is owner.
- Small companies get no allowances.
- CAMA 2020: ss. 222, 305, 308, 377(1), 378.
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.
Recall check: multiple choice
Recent ICAN papers are written, although older papers such as May 2014 included multiple-choice questions. These questions are for quick recall. The written questions that follow are closer to the exam.
Question 1. Which allowance was abolished for assets acquired from 1 January 2026?
- Annual allowance
- Initial allowance
- Both
- Neither
Show the answer
B. The NTA 2025 scrapped the initial allowance; annual allowance remains on a straight-line basis.
Question 2. Under the NTA 2025, the rate for motor vehicles is:
- 10%
- 20%
- 25%
- 50%
Show the answer
C. Class 3 is 25%.
Question 3. Under the NTA 2025, plant is in the class with a rate of:
- 10%
- 20%
- 25%
- 95%
Show the answer
B. Class 2 is 20%.
Question 4. The NTA 2025 requires what amount of cost to be kept as a notional residue?
- ₦10 per asset
- 1% of cost
- 5% of cost
- 10% of cost
Show the answer
B. 1% of cost is kept on the schedule and does not change the allowance.
Question 5. The 66⅔% restriction on capital allowances:
- Applies under the NTA 2025
- Applied under CITA but not under the NTA
- Applies to small companies
- Applies to buildings only
Show the answer
B. The NTA did not retain the restriction.
Question 6. Capital allowances on an asset acquired on hire purchase are based on:
- The cash price plus interest
- Instalments paid, excluding interest
- The deposit only
- The lessor’s cost
Show the answer
B. Interest is excluded, and the hirer is treated as owner.
Question 7. Balancing allowances and charges under the NTA 2025:
- Continue as under CITA
- Were not provided for
- Apply only to vehicles
- Apply only to buildings
Show the answer
B. The NTA made no provision for them.
Question 8. Small companies under the NTA 2025:
- Get double allowances
- Get no capital allowances
- Get allowances at half rate
- Get allowances on vehicles only
Show the answer
B. They are exempt from income tax and claim no allowances.
Question 9. Investment allowance of 10% was repealed with effect from:
- 1 January 2020
- 1 September 2023
- 1 January 2026
- It still applies
Show the answer
B. The Finance Act 2023 repealed it from 1 September 2023.
Question 10. Which section of CAMA 2020 sets the director’s duty of care and skill?
- Section 308
- Section 400
- Section 405
- Section 409
Show the answer
A. Directors should test the assumptions behind a decision.
Written questions
Question 11 (10 marks). (a) State four conditions for granting capital allowances under the NTA 2025. (4 marks) (b) Explain the treatment of an asset used partly to earn non-taxable income. (3 marks) (c) State three differences between CITA and the NTA 2025. (3 marks)
Question 12 (20 marks). Delta Limited has a 31 December year-end. In the year ended 31 December 2026 it bought: a building, ₦40,000,000 (land of ₦8,000,000 included); plant, ₦30,000,000; motor vehicles, ₦12,000,000; software, ₦4,000,000; furniture, ₦5,000,000. Assessable profit for 2027 before allowances is ₦22,000,000. (a) Compute the capital allowances for 2027 under the NTA 2025. (10 marks) (b) Compute total profit, assuming no losses. (3 marks) (c) State the notional residue to be kept. (4 marks) (d) State the tax rate. (3 marks)
Question 13 (10 marks). A company buys equipment on hire purchase for a cash price of ₦6,000,000, paying a ₦1,500,000 deposit and 12 instalments of ₦500,000. (a) Compute the interest. (3 marks) (b) State the qualifying expenditure per instalment. (3 marks) (c) State who claims the allowance. (2 marks) (d) State the lessor’s position. (2 marks)
Model answers
Show the model answer to Question 11
(a) Conditions (4 marks). Any four:
- owner at the end of the basis period
- used for the trade
- certificate of acceptance for priority sector
- VAT and import duty paid
- prorating for non-taxable income of 10% or more
- no allowance where cost is allowed as a revenue expense
- no allowance on excess cost from unofficial foreign exchange
(1 each)
(b) Part use (3 marks). The allowance is prorated to the part used to earn taxable income if non-taxable income is 10% or more of total income. (2) It is not prorated if non-taxable income is below 10%. (1)
(c) Differences (3 marks). No initial allowance; no investment allowance or balancing adjustments; no 66⅔% restriction; straight-line annual allowance; 1% notional residue. (1 each, any three)
Show the model answer to Question 12
(a) Allowances (10 marks).
- Building.
land is not qualifying, so cost = 40,000,000 − 8,000,000 = 32,000,000 - 10% = ₦3,200,000. (2)
- Plant.
20% × 30,000,000 = ₦6,000,000. (2) - Motor vehicles.
25% × 12,000,000 = ₦3,000,000. (2) - Software.
25% × 4,000,000 = ₦1,000,000. (2) - Furniture.
20% × 5,000,000 = ₦1,000,000. (1) - Total = ₦14,200,000. (1)
(b) Total profit (3 marks). 22,000,000 − 14,200,000 = ₦7,800,000; there is no 66⅔% cap. (3)
(c) Notional residue (4 marks). 1% of qualifying cost: building ₦320,000; plant ₦300,000; vehicles ₦120,000; software ₦40,000; furniture ₦50,000; total ₦830,000. (4)
(d) Rate (3 marks). 30% under the NTA 2025, as it is not a small company. (3)
Show the model answer to Question 13
(a) Interest (3 marks).
- Total paid.
1,500,000 + (12 × 500,000) = ₦7,500,000. (1) - Interest = 7,500,000 − 6,000,000 = ₦1,500,000. (2)
(b) Per instalment (3 marks). Interest per instalment = 1,500,000 ÷ 12 = ₦125,000, so qualifying expenditure = 500,000 − 125,000 = ₦375,000. (3)
(c) Who claims (2 marks). The hirer is treated as the owner and claims the allowance. (2)
(d) Lessor (2 marks). The lessor is not entitled to capital allowance on that expenditure. (2)
Pathfinder on Initial, annual and investment allowances, NTA classes, hire purchase and transition
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
Jumbo Limited’s allowances were computed with initial, annual and investment allowances and restricted to 66⅔% of assessable profit. Those rules were CITA rules; for years from 2026 the NTA has no initial or investment allowance and no cap.
Revise first: CITA: rates and rules (to 31 December 2025)
Source: ICAN Pathfinder, Advanced Taxation. Diets covered: March/July Diet, 2020.
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