If you run payroll for a Nigerian company, PAYE is the one calculation you cannot afford to get wrong. Get it right and nobody notices. Get it wrong and you're dealing with underpaid employees, overpaid tax remittances, and a compliance headache that compounds every single month.
This guide walks you through exactly how PAYE works in Nigeria under the new Nigeria Tax Act 2025 (effective January 1, 2026), with real numbers, step-by-step breakdowns, and practical examples at different salary levels. No jargon walls. No theory without application. Just the math your payroll team needs to get right.
What is PAYE in Nigeria?
PAYE stands for Pay As You Earn. It's the system through which employers deduct personal income tax from employee salaries and remit it to the relevant state tax authority — typically the State Internal Revenue Service (SIRS) where the employee resides.
The key word is "employer." Unlike self-assessment tax, PAYE puts the responsibility squarely on the company. If you're running payroll, you are the tax collector. You calculate, you deduct, you remit. If the numbers are wrong, the liability is yours.
Every employee earning above a certain threshold must have PAYE deducted from their salary before it hits their bank account. The amount depends on their taxable income after reliefs and deductions — which is where most of the complexity (and most of the mistakes) lives.
What Changed in 2026? The Nigeria Tax Act 2025
Before we get into the math, you need to understand what changed. The Nigeria Tax Act (NTA) 2025, signed into law in June 2025 and effective from January 1, 2026, rewrote the rules for personal income tax in Nigeria. If your payroll system is still using the old PITA rates, your calculations are wrong and your company is non-compliant.
Here are the changes that matter most for payroll:
The first ₦800,000 of chargeable income is now completely tax-free. Under the old system, tax started from the very first naira. Now, employees earning ₦800,000 or less annually in chargeable income pay zero PAYE. This is a significant relief for minimum wage earners and lower-income employees.
New progressive tax bands replace the old 7%–24% structure. The NTA 2025 introduces six tax bands ranging from 0% to 25%. The rates are more favorable for low and middle-income earners, but the top rate increased from 24% to 25% for income above ₦50 million.
The Consolidated Relief Allowance (CRA) has been abolished. The old system gave every employee a CRA equal to the higher of ₦200,000 or 1% of gross income, plus 20% of gross income. That's gone. In its place, the NTA introduces a simpler rent relief structure.
Rent relief is now capped at ₦500,000 or 20% of annual rent paid — whichever is lower. This replaces part of the old CRA and is available to employees who pay rent on their primary residence.
Minimum tax has been abolished. Under the old rules, even if your reliefs wiped out your tax liability, you still paid 1% of gross income as minimum tax. That rule no longer exists.
The 2026 PAYE Tax Bands
Here are the official tax bands under the Nigeria Tax Act 2025, effective for all payroll runs from January 2026:
Chargeable Income Band (Annual)Tax RateFirst ₦800,0000%Next ₦2,200,000 (₦800,001 – ₦3,000,000)15%Next ₦7,000,000 (₦3,000,001 – ₦10,000,000)18%Next ₦10,000,000 (₦10,000,001 – ₦20,000,000)21%Next ₦30,000,000 (₦20,000,001 – ₦50,000,000)23%Above ₦50,000,00025%
The bands are progressive, meaning each portion of income is taxed at the rate for that specific band — not your entire income at the highest rate. This is the most common misunderstanding in PAYE calculation, and it's the reason employees sometimes think they're being overtaxed.
Step-by-Step: How to Calculate PAYE
Here's the process, start to finish. Every monthly payroll run follows this sequence.
Step 1: Determine Annual Gross Income
Add up every component of the employee's compensation package and multiply by 12 to get the annual figure. This includes basic salary, housing allowance, transport allowance, utility allowance, meal allowance, leave allowance, and any other regular monetary benefits specified in the employment contract.
If an employee earns ₦350,000 monthly gross, their annual gross income is ₦4,200,000.
Don't forget: irregular payments like bonuses may also be included depending on whether they're taxable. More on that later.
Step 2: Calculate Allowable Deductions
These are the statutory deductions that reduce gross income before tax is applied. Under the NTA 2025, the main deductions are:
Pension contribution (employee portion): 8% of basic salary plus housing and transport allowances. This is mandatory for organizations with 3 or more employees under the Pension Reform Act.
National Housing Fund (NHF): 2.5% of gross salary for employees in organizations that participate in the NHF scheme.
Rent relief: 20% of actual annual rent paid, capped at ₦500,000. The employee must provide documentation of rent payments.
National Health Insurance Scheme (NHIS): 5% of basic salary, where applicable.
Life insurance premiums: Qualifying premiums paid by the employee are deductible.
Not every employee will have all of these deductions. Pension is the most universal. NHF and NHIS depend on whether the employer participates in those schemes. Rent relief requires documentation.
Step 3: Calculate Chargeable Income
Chargeable income = Annual gross income minus all allowable deductions.
This is the number you apply the tax bands to. Not gross income. Not net income. Chargeable income after deductions.
Step 4: Apply the Progressive Tax Bands
Take the chargeable income and apply each band in order. The first ₦800,000 is taxed at 0%. The next ₦2,200,000 at 15%. And so on.
Step 5: Divide by 12
The result from Step 4 is the annual PAYE. Divide by 12 to get the monthly PAYE amount that should be deducted from the employee's salary.
Worked Example 1: Mid-Level Employee (₦350,000/month)
Let's walk through a real calculation for an employee earning ₦350,000 per month.
Salary breakdown:
Basic salary: ₦175,000/month
Housing allowance: ₦87,500/month
Transport allowance: ₦52,500/month
Other allowances: ₦35,000/month
Monthly gross: ₦350,000
Annual gross: ₦4,200,000
Step 2 — Deductions:
Pension (8% of basic + housing + transport): 8% × (₦175,000 + ₦87,500 + ₦52,500) × 12 = ₦302,400/year
NHF (2.5% of gross): 2.5% × ₦4,200,000 = ₦105,000/year
Rent relief: Employee pays ₦1,500,000/year in rent. 20% = ₦300,000 (under the ₦500,000 cap, so full amount applies)
Total deductions: ₦302,400 + ₦105,000 + ₦300,000 = ₦707,400
Step 3 — Chargeable income:
₦4,200,000 – ₦707,400 = ₦3,492,600
Step 4 — Apply tax bands:
First ₦800,000 at 0% = ₦0
Next ₦2,200,000 at 15% = ₦330,000
Remaining ₦492,600 (₦3,492,600 – ₦3,000,000) at 18% = ₦88,668
Annual PAYE: ₦0 + ₦330,000 + ₦88,668 = ₦418,668
Monthly PAYE: ₦418,668 ÷ 12 = ₦34,889
So this employee takes home roughly ₦350,000 minus ₦34,889 PAYE minus pension and other statutory deductions each month. The effective tax rate on gross income is about 10% — which is considerably lower than what this same employee would have paid under the old system.
Worked Example 2: Junior Employee (₦150,000/month)
Now let's look at a lower-income employee.
Annual gross: ₦150,000 × 12 = ₦1,800,000
Deductions:
Pension (8% of basic + housing + transport, assuming 60% of gross): 8% × ₦1,080,000 = ₦86,400
NHF: 2.5% × ₦1,800,000 = ₦45,000
Rent relief: Employee pays ₦600,000/year. 20% = ₦120,000
Total deductions: ₦251,400
Chargeable income: ₦1,800,000 – ₦251,400 = ₦1,548,600
Apply tax bands:
First ₦800,000 at 0% = ₦0
Remaining ₦748,600 at 15% = ₦112,290
Annual PAYE: ₦112,290
Monthly PAYE: ₦112,290 ÷ 12 = ₦9,358
Under the old system, this employee would have paid more. The ₦800,000 zero-rate band is where the NTA 2025 makes the biggest difference for lower-income earners.
Worked Example 3: Senior Employee (₦1,200,000/month)
Let's see how the higher bands work.
Annual gross: ₦1,200,000 × 12 = ₦14,400,000
Deductions:
Pension: 8% × (₦8,640,000 — assuming basic + housing + transport is 60% of gross) = ₦691,200
NHF: 2.5% × ₦14,400,000 = ₦360,000
Rent relief: Employee pays ₦3,000,000/year. 20% = ₦600,000 — but capped at ₦500,000
Total deductions: ₦691,200 + ₦360,000 + ₦500,000 = ₦1,551,200
Chargeable income: ₦14,400,000 – ₦1,551,200 = ₦12,848,800
Apply tax bands:
First ₦800,000 at 0% = ₦0
Next ₦2,200,000 at 15% = ₦330,000
Next ₦7,000,000 at 18% = ₦1,260,000
Remaining ₦2,848,800 (₦12,848,800 – ₦10,000,000) at 21% = ₦598,248
Annual PAYE: ₦0 + ₦330,000 + ₦1,260,000 + ₦598,248 = ₦2,188,248
Monthly PAYE: ₦2,188,248 ÷ 12 = ₦182,354
The effective tax rate here is about 15.2% of gross income. Even at ₦14.4 million annual income, the effective rate stays well below the 21% marginal rate because of how progressive bands work — the first ₦800,000 is free, and each subsequent band only applies to the income within that specific range.
Common Mistakes Payroll Teams Make
After working with dozens of payroll operations, these are the errors that come up again and again:
Using the old tax bands. If your payroll formula still references 7%, 11%, 15%, 19%, 21%, and 24%, you're using the pre-2026 rates from PITA. Every payslip generated with the old rates is wrong, and every remittance based on those numbers is either over or under what should have been paid.
Applying the top rate to all income. An employee in the 18% band doesn't pay 18% on their entire income. They pay 0% on the first ₦800,000, 15% on the next ₦2.2 million, and 18% only on the amount above ₦3 million. This is fundamental to progressive taxation, and getting it wrong inflates the tax number significantly.
Forgetting to deduct pension before calculating tax. Pension is a pre-tax deduction. If you apply tax bands to gross income without subtracting pension first, the chargeable income is too high and the tax is overstated.
Ignoring rent relief. Many payroll teams skip rent relief because employees haven't submitted documentation. That's fair from a compliance standpoint — you can't claim what you can't prove. But if you do have the documentation, not applying the relief means your employees are overpaying tax.
Not updating payroll software. If you're using an Excel template or a payroll tool that hasn't been updated for the NTA 2025, the formulas are wrong. Check with your provider. If they can't confirm 2026 compliance, switch.
How Bonuses and Irregular Payments Affect PAYE
Bonuses complicate things because they're not part of the regular monthly salary. Here's how to handle them:
Taxable bonuses are added to the employee's income for the period in which they're paid. If you pay a ₦500,000 bonus in March, that bonus gets added to March's gross income, and the PAYE for March is recalculated accordingly. Some payroll teams annualize the bonus to determine the correct marginal rate, then prorate the additional tax back to the payment month.
Non-taxable bonuses are payments that, by agreement or policy, are excluded from taxable income. These don't affect the PAYE calculation. But be careful — the default assumption is that bonuses are taxable. If you're excluding one, document why.
The key principle: if a payment increases the employee's economic benefit, it's probably taxable unless specifically exempted.
Monthly Remittance: What Happens After You Calculate
Calculating PAYE is only half the job. You also need to remit the deducted tax to the appropriate tax authority by the 10th of the following month. So tax deducted from January salaries must be remitted by February 10th.
Remittance goes to the State Internal Revenue Service (SIRS) of the state where the employee is deemed to reside. For most employees in Lagos, that's the Lagos State Internal Revenue Service (LIRS). For employees in Abuja, it's the Federal Capital Territory Internal Revenue Service (FCT-IRS).
Late remittance attracts penalties. The NTA 2025 gives state authorities stronger auditing powers, and with digital cross-referencing becoming more common, the days of quiet non-compliance are getting shorter.
Keep records of every deduction, every remittance, and every payslip. When the tax authority comes asking — and eventually they will — your records are your defense.
A Note on Payroll Software
If you're still calculating PAYE in a spreadsheet, you're taking an unnecessary risk. Spreadsheets don't validate inputs, don't enforce band logic consistently, and don't produce audit-ready records. One broken formula silently corrupts every downstream calculation.
Modern payroll software — like SynxPay — applies the current NTA 2025 tax bands automatically, handles pension and relief deductions as structured inputs, generates payslips with line-by-line tax breakdowns, and produces the records your finance team needs for remittance and reconciliation.
The math isn't optional. But doing the math manually every month, for every employee, with no safety net? That's a choice. And it's not a good one.
Quick Reference: PAYE Calculation Checklist
Before every monthly payroll run, confirm these items:
Employee data is current. Salary, pension rate, rent documentation, employment status — all updated before you generate payslips.
Deductions are applied in the right order. Pension and NHF reduce gross income before tax. Post-tax deductions like loan repayments come after.
Tax bands are correct. You're using the 2026 NTA bands (0%, 15%, 18%, 21%, 23%, 25%), not the old PITA rates.
Bonuses are classified correctly. Taxable bonuses are included in chargeable income. Non-taxable bonuses are excluded. The classification is explicit, not assumed.
Monthly PAYE is calculated from annual figures. Always compute annual tax first, then divide by 12. Don't apply annual tax bands to monthly income directly — the band thresholds are annual.
Remittance deadline is tracked. Tax deducted this month is due to the SIRS by the 10th of next month.
Summary
PAYE calculation in Nigeria isn't complicated once you understand the structure. It's a sequence: gather gross income, subtract allowable deductions, arrive at chargeable income, apply progressive tax bands, divide by 12. The Nigeria Tax Act 2025 made the bands more favorable for most employees and simpler to apply — but only if your payroll system is actually using the right numbers.
The most important thing you can do right now is confirm that your payroll process reflects the 2026 rules. Check your formulas. Check your software. Check your payslips. If the first ₦800,000 isn't showing as tax-free, something is wrong and it needs to be fixed before your next remittance.
Your employees are counting on you to get this right. So is the tax authority.
SynxPay applies Nigerian PAYE tax bands automatically as part of every payroll run. If you're tired of manual calculations and spreadsheet risk, start your free account and run your first payroll with confidence.