How to calculate PAYE in Nigeria (2025)
PAYE — Pay As You Earn — is the income tax an employer deducts from an employee's salary each month and remits to the relevant state tax authority. Getting it right matters twice over: your staff are paid the correct net amount, and your remittances match what you actually owe. This guide walks through the method under the current rules, with a full worked example in naira.
The bands and reliefs below are the Nigeria Tax Act 2025 regime, in force from 1 January 2026 — the rules our payroll applies to 2026 and later periods. Earlier periods use the previous Finance Act 2020 model. Tax law changes; if you are reading this much later, confirm the current rates with the tax authority or your accountant.
Step 1: Start from gross pay
Gross pay is everything the employee earns for the period before any deduction — basic salary plus allowances such as housing and transport. A clear salary structure is the foundation, because the statutory bases below are derived from its components. We will use these monthly figures throughout:
| Component | Monthly |
|---|---|
| Basic | ₦300,000 |
| Housing | ₦100,000 |
| Transport | ₦50,000 |
| Other allowances | ₦50,000 |
| Gross | ₦500,000 |
Step 2: Work out the statutory deductions
Some contributions are taken from pay and are also allowed as deductions before tax is computed:
- Pension (employee): 8% of basic + housing + transport. Here that base is ₦450,000, so ₦450,000 × 8% = ₦36,000.
- NHIS: 5% of basic. ₦300,000 × 5% = ₦15,000.
- Pension (employer): 10% of the same ₦450,000 base = ₦45,000. This is a company cost — it is not taken from the employee and is not a relief against the employee's tax.
The National Housing Fund applies where captured; it is not in this example.
Step 3: Apply the reliefs (NTA 2025)
The Nigeria Tax Act 2025 abolished the Consolidated Relief Allowance. In its place:
- Statutory contributions remain deductible from taxable income — the employee's pension and NHIS (and NHF where applicable).
- Rent relief: 20% of annual rent paid, capped at ₦500,000. It is zero for a homeowner or an employee with no rent recorded. We will assume no rent recorded here.
- The tax bands themselves make the first ₦800,000 of taxable income tax-free (the 0% band, below).
Step 4: Annualise and run through the bands
PAYE is computed on an annual basis, then divided by twelve. Annualise the figures:
- Gross annual: ₦500,000 × 12 = ₦6,000,000
- Pension (employee) annual: ₦36,000 × 12 = ₦432,000
- NHIS annual: ₦15,000 × 12 = ₦180,000
- Rent relief: ₦0
Taxable income = ₦6,000,000 − ₦432,000 − ₦180,000 − ₦0 = ₦5,388,000.
Nigeria taxes income progressively — each band's rate applies only to the portion of income that falls inside it. The NTA 2025 annual bands are:
| Portion of annual taxable income | Rate |
|---|---|
| First ₦800,000 | 0% |
| Next ₦2,200,000 (₦800k – ₦3m) | 15% |
| Next ₦9,000,000 (₦3m – ₦12m) | 18% |
| Next ₦13,000,000 (₦12m – ₦25m) | 21% |
| Next ₦25,000,000 (₦25m – ₦50m) | 23% |
| Above ₦50,000,000 | 25% |
Running our ₦5,388,000 of taxable income through them:
| Band | Amount taxed | Rate | Tax |
|---|---|---|---|
| First ₦800,000 | ₦800,000 | 0% | ₦0 |
| Next ₦2,200,000 | ₦2,200,000 | 15% | ₦330,000 |
| Remaining | ₦2,388,000 | 18% | ₦429,840 |
| Annual PAYE | ₦759,840 |
Monthly PAYE = ₦759,840 ÷ 12 = ₦63,320.
Step 5: Arrive at net pay
Net pay is gross minus the employee's own deductions:
| Item | Monthly |
|---|---|
| Gross | ₦500,000 |
| Less pension (employee) | −₦36,000 |
| Less NHIS | −₦15,000 |
| Less PAYE | −₦63,320 |
| Net pay | ₦385,680 |
The pension and PAYE you withheld are liabilities you now hold and owe onward — pension to the PFA, PAYE to the state tax authority — until they are remitted.
Why the ledger matters as much as the number
A correct PAYE figure is only half the job. When payroll posts to your accounts, it should keep three things separate: the gross salary expense you incurred, the liabilities you are holding on the employee's behalf (PAYE, pension, and net pay still to be paid), and the moment those liabilities are actually settled. If a run lumps these together, an error stays hidden until a remittance or an audit forces it into the open.
Do it once, correctly, every month
The risk with payroll is not a single hard calculation; it is a small error repeated twelve times a year across every employee. Software removes that risk by deriving each figure from the same salary structure and the current bands, and by keeping a per-employee, per-period record you can defend.
Our payroll and PAYE software applies exactly the calculation above — the NTA 2025 bands, the 8% pension and 5% NHIS bases, and rent relief — computes net pay, and posts the accounting for you.