What Is PAYE Tax in Nigeria?
PAYE (Pay As You Earn) is the system through which employers deduct personal income tax from employees' salaries before payment. Under the Nigeria Tax Act 2025, effective January 1, 2026, the PAYE system was significantly reformed. The first ₦800,000 of annual income is now completely tax-free, replacing the old Consolidated Relief Allowance (CRA). Income above this threshold is taxed progressively at rates from 15% to 25%. Employers are legally required to calculate, deduct, and remit PAYE to the relevant State Internal Revenue Service (SIRS) on behalf of their employees each month.
What Are the 2026 Nigeria PAYE Tax Bands?
The Nigeria Tax Act 2025 introduced six progressive tax bands: ₦0–₦800,000 at 0%, ₦800,001–₦3,000,000 at 15%, ₦3,000,001–₦12,000,000 at 18%, ₦12,000,001–₦25,000,000 at 21%, ₦25,000,001–₦50,000,000 at 23%, and above ₦50,000,000 at 25%. For example, an employee earning ₦3,600,000 annually with ₦498,000 in deductions has a chargeable income of ₦3,102,000 — paying ₦0 on the first ₦800,000, ₦330,000 on the next ₦2,200,000, and ₦18,360 on the remaining ₦102,000, totalling ₦348,360 annual PAYE (₦29,030/month). If you earn income as a self-employed contractor instead, use our Nigeria freelancer tax calculator for the correct deductions.
What Deductions Reduce Your PAYE in Nigeria?
Several statutory deductions reduce your chargeable income before PAYE is calculated. Pension contribution (8%) is mandatory for employees in organisations with 3 or more staff — your employer also contributes 10%. National Housing Fund (NHF) at 2.5% of basic salary is deducted to fund the Federal Mortgage Bank. Rent relief allows you to deduct 20% of your annual rent, capped at ₦500,000, provided you supply valid receipts or a lease agreement. These deductions together can significantly lower your tax bill — for instance, an employee earning ₦300,000 monthly with ₦600,000 annual rent saves ₦498,000 in deductions before any tax is applied.
How Do You Calculate PAYE Step by Step?
Follow these steps to calculate your 2026 PAYE manually: (1) Multiply your monthly gross salary by 12 to get gross annual income. (2) Subtract your pension contribution (8%), NHF (2.5%), and rent relief (20% of rent, max ₦500,000) to arrive at chargeable income. (3) Apply the progressive tax bands to chargeable income — only the portion in each band is taxed at that band's rate. (4) Divide annual PAYE by 12 for your monthly deduction. (5) Subtract monthly pension, NHF, and PAYE from your monthly gross to find your take-home pay.
What Changed in Nigeria Tax Law for 2026?
The Nigeria Tax Act 2025, which took effect on January 1, 2026, replaced the Personal Income Tax Act (PITA). The key changes are: the Consolidated Relief Allowance (CRA) was abolished — previously 20% of gross income plus ₦200,000. A new ₦800,000 tax-free threshold was introduced, meaning employees earning the minimum wage or up to ₦1.2 million annually now pay zero income tax. The rent relief system was introduced as a targeted replacement. Tax rates were simplified from six bands (7–24%) to five taxable bands (15–25%) plus the zero band. These changes benefit low and middle-income earners while simplifying compliance for employers. Compare your salary structure with our salary to hourly calculator or plan your investments with the compound growth calculator.
What Is the Difference Between PAYE and Direct Assessment?
PAYE applies to employees — your employer calculates and remits tax on your behalf from your monthly salary. Direct Assessment applies to self-employed individuals, business owners, and freelancers who must calculate and pay their own tax through annual self-assessment returns filed with the State Internal Revenue Service (SIRS). Both systems use the same progressive tax bands under the 2026 law, but the deduction mechanisms differ. PAYE taxpayers benefit from automatic monthly deductions with no filing burden, while Direct Assessment taxpayers must file by March 31st of the following year. If you receive both employment income and freelance income, the employment portion is handled through PAYE and the remainder through Direct Assessment.
How Does Employer Pension Contribution Work?
Under the Pension Reform Act, employers must contribute at least 10% of an employee's gross emolument (basic salary, housing allowance, and transport allowance) to the employee's Retirement Savings Account (RSA), in addition to the employee's mandatory 8% contribution. This 18% combined contribution is managed by a licensed Pension Fund Administrator (PFA) chosen by the employee. The employer's 10% is not deducted from the employee's salary — it is an additional cost to the employer above the gross salary. Both contributions are tax-exempt, meaning they reduce your chargeable income for PAYE purposes. Employees can also make voluntary contributions beyond the mandatory 8% for additional tax relief.