Introduction
Pay As You Earn (PAYE) is the tax employers in Nigeria are required to deduct from employees' salaries every month and remit to the relevant State Internal Revenue Service. Getting the calculation wrong is one of the most common sources of payroll errors — and one of the easiest to get right once you understand the formula.
This guide walks through exactly how PAYE is calculated under the Nigeria Tax Act (NTA) 2025, which took effect on 1 January 2026, with a worked example you can follow along with.
What changed on 1 January 2026
The Nigeria Tax Act 2025 replaced the old Consolidated Relief Allowance (CRA) with a new Rent Relief, and introduced new tax bands running from 0% to 25%. If you're still using the pre-2026 CRA formula, your PAYE figures are now incorrect.
Why it matters
Nigerian employers are legally responsible for deducting and remitting PAYE on behalf of their staff. Getting it wrong has real consequences:
- Under-deduction leaves your company liable for the shortfall, plus penalties and interest.
- Over-deduction erodes employee trust and creates avoidable payroll disputes.
- Late remittance attracts fines from the State Internal Revenue Service.
Who this applies to
Every employer with staff on payroll in Nigeria — regardless of company size — is required to operate PAYE under the Personal Income Tax Act (PITA).
Main content
Step 1 — Determine gross annual income
Start with the employee's total annual compensation: basic salary, housing, transport, and any other taxable allowances.
Step 2 — Deduct Rent Relief (if applicable)
The old CRA no longer exists. In its place, employees who pay rent for their own residential accommodation can claim Rent Relief: the lower of 20% of annual rent paid, or ₦500,000 — whichever is smaller. This requires a lease agreement and rent receipts as documentary proof.
Rent Relief = min(20% × annual rent paid, ₦500,000)
Employees who don't pay rent themselves (e.g. living in employer-provided housing, or with family) simply don't get this deduction.
Step 3 — Deduct statutory contributions
Pension contributions (typically 8% of basic + housing + transport) and NHF contributions (2.5% of basic salary) are still deducted before arriving at taxable income — the reform didn't change these.
Minimum wage exemption
Employees earning at or below the national minimum wage (₦70,000/month, ₦840,000/year) pay no PAYE at all, regardless of the calculation below.
Step 4 — Apply the new tax bands
| Annual Taxable Income | Rate |
|---|---|
| First ₦800,000 | 0% |
| Next ₦2,200,000 | 15% |
| Next ₦9,000,000 | 18% |
| Next ₦13,000,000 | 21% |
| Next ₦25,000,000 | 23% |
| Above ₦50,000,000 | 25% |
Worked example
For an employee earning ₦4,800,000 gross annually who pays ₦1,500,000 in rent: Rent Relief is ₦300,000 (20% of rent, under the ₦500,000 cap), pension is ₦384,000 (8% of gross), and NHF is ₦120,000 (2.5% of gross). Taxable income is ₦3,996,000. Applying the bands above gives ₦509,280 in annual PAYE — about ₦42,440 per month.
Try the calculator
Enter a salary below to see the full band-by-band breakdown instantly.
PAYE Calculator
Updated for the Nigeria Tax Act 2025 (effective 1 Jan 2026)
Rent relief is the lower of 20% of rent paid or ₦500,000/year.
This is an estimate based on gross salary, rent relief, pension, and NHF only. It does not account for NHIS, life assurance premiums, approved donations, or benefits-in-kind — for exact payroll figures, run it through KalHR.
Deductions before tax
Tax band breakdown
Best practices
- Recalculate reliefs whenever an employee's salary structure changes.
- Automate the calculation — manual spreadsheets are the single biggest source of PAYE errors we see in Nigerian SMEs.
- Reconcile your PAYE remittances against payroll registers every month, not just at year-end.
- Keep signed evidence of any tax reliefs claimed (e.g. life assurance premiums) in the employee's file.
Common mistakes
Frequent employer errors
- Still running the old CRA formula instead of Rent Relief after 1 January 2026
- Granting Rent Relief without a lease agreement or rent receipts on file
- Forgetting to deduct pension and NHF before applying tax bands
- Not applying the minimum wage exemption for your lowest-paid staff
- Remitting to the wrong State Internal Revenue Service when staff relocate
FAQ
Is PAYE the same in every state? The tax bands are federal (under the Nigeria Tax Act 2025), but you remit to the state where the employee is resident — not necessarily where your company is registered.
What happened to the Consolidated Relief Allowance? It was fully repealed by the Nigeria Tax Act 2025, effective 1 January 2026, and replaced by Rent Relief — a deduction tied to actual rent paid, rather than a flat allowance everyone received automatically.
Do employees need to prove they pay rent to claim Rent Relief? Yes — a lease agreement and rent payment receipts are required documentation. Without them, an employee isn't eligible for the deduction.
Do I need to file anything annually? Yes — employers must file an annual PAYE tax return (Form H1) with each relevant state, typically by January 31st.
What happens if I under-remit PAYE? The state revenue service can assess penalties and interest on the shortfall, and in serious cases pursue the company directly.
How KalHR helps
KalHR's payroll engine calculates PAYE automatically for every employee, applies the correct reliefs and statutory deductions, and keeps your tax bands up to date — so you never have to touch a spreadsheet formula again.
PAYE Calculation Worksheet
A simple spreadsheet to sanity-check your PAYE calculations
Conclusion
PAYE calculation is formulaic once you know the steps: gross income, minus reliefs and statutory deductions, taxed across the applicable bands. The real risk isn't the math — it's doing it manually, every month, for every employee. Automating it removes both the errors and the busywork.
