Updated for the tax rules in force from 1 January 2026. The Nigeria Tax Act 2025 replaced the old Personal Income Tax Act rules, and the Federal Inland Revenue Service (FIRS) is now the Nigeria Revenue Service (NRS).
PAYE tax in Nigeria is the tax that is deducted from an employee’s monthly salary by the employer and remitted directly to the government on behalf of the employee.
PAYE means Pay As You Earn. It is applied to anyone earning income in paid employment, and since 1 January 2026 it is governed by the Nigeria Tax Act 2025, which replaced the Personal Income Tax Act (PITA).
It is one of the most important forms of direct tax in Nigeria because it affects monthly salary earnings, payroll structure, annual income declarations, and general worker compliance.
Understanding how to calculate PAYE tax is very important for new workers, employers, HR departments, business owners that run payroll, and individuals who want to understand how much of their salary is legally deducted as tax.
Many people receive salary alerts without ever understanding how those deductions are calculated. Some assume that employers “just deduct anything they want”. But in reality, the PAYE calculation follows a structure and specific percentages.
This article explains how to calculate PAYE tax in Nigeria step by step, breaking down the allowances, reliefs, taxable income parameters, progressive tax bands, and final payable amount. This information is useful for both employers and employees.
What You Must Understand First
Before PAYE can be calculated, break the salary down into:
- Gross income
Total income before any deductions: basic salary plus benefits and allowances such as housing and transport. - Allowable deductions
Your pension contribution, National Housing Fund (NHF) contribution, health insurance contributions and life insurance premiums reduce the amount that is taxed. - Rent relief
If you pay rent for the home you live in, 20% of the rent you pay in the year is deducted, up to a maximum of ₦500,000.
What is left after these deductions is your taxable income. The tax bands are then applied to it.
Rent Relief Replaced the Consolidated Relief Allowance
Until 31 December 2025, every employee got a Consolidated Relief Allowance (CRA) of ₦200,000 or 1% of gross income, whichever was higher, plus 20% of gross income. The Nigeria Tax Act 2025 abolished the CRA from 1 January 2026.
In its place is rent relief: 20% of the annual rent you pay, capped at ₦500,000. You claim it by declaring your rent to your employer, usually with a tenancy agreement or rent receipt. If you do not pay rent, for example because you live in your own home or with family, you do not get this relief.
PAYE Tax Bands In Nigeria
Taxable income is taxed in these bands for the year:
| Taxable income in the year | Tax rate |
|---|---|
| First ₦800,000 | 0% |
| Next ₦2,200,000 (up to ₦3 million) | 15% |
| Next ₦9,000,000 (up to ₦12 million) | 18% |
| Next ₦13,000,000 (up to ₦25 million) | 21% |
| Next ₦25,000,000 (up to ₦50 million) | 23% |
| Above ₦50,000,000 | 25% |
The first ₦800,000 of taxable income each year is tax free. Each band only applies to the part of your income that falls inside it, so moving into a higher band never makes your whole salary taxed at the higher rate.
Practical Example: How To Calculate PAYE in Nigeria
Assume someone earns ₦3,000,000 per year (₦250,000 per month) gross salary, contributes 8% to their pension and pays ₦1,200,000 a year in rent. To keep the maths simple, the pension is worked out on the full gross salary.
Step 1: Pension contribution
8% of ₦3,000,000 = ₦240,000
Step 2: Rent relief
20% of ₦1,200,000 = ₦240,000 (below the ₦500,000 cap, so the full amount applies)
Step 3: Taxable income
₦3,000,000 − ₦240,000 − ₦240,000 = ₦2,520,000
Step 4: Apply the tax bands
First ₦800,000 at 0% = ₦0
Remaining ₦1,720,000 at 15% = ₦258,000
Total annual PAYE = ₦258,000
Monthly PAYE = ₦258,000 ÷ 12 = ₦21,500
Under the old rules, the same salary paid about ₦24,967 a month. For this person the new law means a smaller deduction, but the result depends on your salary and whether you pay rent: people on high incomes generally pay more than before.
This is how employers are supposed to calculate PAYE.
Special Cases
- Low income earners
If your taxable income is ₦800,000 a year or less (about ₦66,667 a month after deductions), you pay no PAYE at all. - Some benefits are taxable
Some fringe benefits like official vehicles, domestic staff, furniture allowance etc are taxable. - Some allowances are exempt
NHF, Pension, and Life Insurance Premium are allowable deductions. - Newly employed staff
Even if someone just started work, PAYE begins immediately based on salary band.
Why It Is Important To Understand PAYE Calculation
Understanding how PAYE works helps workers know:
- Whether employer is deducting correctly
- Whether HR payroll is compliant
- Whether salary negotiation actually reflects take-home pay
- Whether tax clearance certificate process will work smoothly
- Whether personal budgeting can be adjusted around tax deductions
For employers, correct PAYE calculation protects the organisation because the state tax authority can apply penalties for wrong remittance.
How Employers Remit PAYE
PAYE is remitted monthly to the relevant State Internal Revenue Service where the employee resides. Each state has its own revenue authority. Payment receipts are frequently required when applying for tax clearance certificate (TCC).
Conclusion
PAYE is a major pillar of Nigeria’s personal income tax system. It affects almost every employee in formal employment. Calculating PAYE is not random, it is structured.
First determine gross income, subtract allowable deductions and rent relief, then apply the tax bands to determine the correct payable amount. Employers are legally required to deduct and remit PAYE every month.
Understanding how to calculate PAYE tax allows workers to fully understand their payslip deductions, and it helps employers maintain legal transparency.
