PAYE Tax in Nigeria: A Complete Employer's Guide to Deducting and Remitting Staff Tax

The moment you hire your first employee in Nigeria, you take on a set of legal obligations that most founders are not fully prepared for. One of the most important is PAYE, Pay As You Earn, the system through which employers deduct income tax from employee salaries and remit it to the relevant state tax authority on the employee's behalf.

PAYE is not optional. It is not something you address when your business gets bigger. It is a statutory obligation that applies from the moment you begin paying staff, and the penalties for getting it wrong are significant.

This guide covers how PAYE works, what changed under the 2026 tax reforms, how to calculate it correctly, and what your obligations as an employer look like in practice.

WHAT IS PAYE AND HOW DOES IT WORK?

PAYE is the mechanism through which Personal Income Tax (PIT) is collected from employees in Nigeria. Rather than employees paying their own income tax directly to the tax authority, the employer calculates the tax owed on each employee's monthly income, deducts it from the salary before payment, and remits it to the relevant State Internal Revenue Service (SIRS) of the state where the employee is resident.

This means the employee receives their net salary, and the government receives the tax, without the employee needing to handle the remittance themselves. The employer acts as the tax collection agent and carries responsibility for accuracy and timeliness.

WHAT CHANGED UNDER THE NIGERIA TAX ACT 2025?

The Nigeria Tax Act 2025 came into force on January 1, 2026 and introduced material changes to how PAYE is calculated. Every employer in Nigeria must ensure their payroll system reflects the new framework.

Key changes include:

Employees earning N800,000 or less per year (approximately N66,667 per month) pay zero income tax. This is a significant increase from the previous N300,000 threshold.

The old Consolidated Relief Allowance has been replaced with a Rent Relief. Employees who pay rent can now deduct 20 percent of their annual rent from their chargeable income, capped at N500,000 per year. Employees who own their home or live rent-free do not qualify for this relief.

Pension contributions, currently 8 percent of pensionable income from the employee's side, remain deductible.

Progressive tax bands now apply from 0 percent to a maximum of 25 percent for high earners, making Nigeria's top rate competitive compared to peer African economies.

Gratuity payments are now taxable under the new framework. If your business pays gratuity, this needs to be factored into your payroll tax calculations.

HOW TO CALCULATE PAYE

The PAYE calculation follows a structured sequence. For each employee:

Step 1: Determine gross income. This includes basic salary, housing allowance, transport allowance, bonuses, overtime, and any other cash remuneration.

Step 2: Deduct allowable contributions. Subtract the employee's pension contribution (8 percent of pensionable income), National Housing Fund contribution (2.5 percent of basic salary), and any life assurance premiums up to N100,000.

Step 3: Apply the Rent Relief if applicable. Deduct 20 percent of annual rent actually paid, capped at N500,000.

Step 4: Apply the progressive tax bands to the resulting chargeable income to arrive at the annual PAYE liability.

Step 5: Divide the annual PAYE by 12 to get the monthly deduction amount per employee.

This calculation must be performed for every employee, every month, reflecting any changes in their income, contributions, or relief eligibility. Using the old CRA-based calculation method from before 2026 makes your payroll automatically non-compliant.

WHAT ARE YOUR OBLIGATIONS AS AN EMPLOYER?

Monthly Deduction and Remittance

You must deduct PAYE from employee salaries each month and remit the total amount to the State Internal Revenue Service of the state where the employee is resident, not where your company is registered, but where the employee lives. The remittance deadline is the 10th of the month following the month in which deductions were made. September deductions must reach the SIRS by October 10.

Annual PAYE Return

In addition to monthly remittances, employers must file an annual PAYE return with the relevant SIRS by January 31 of the following year. This return reconciles the total PAYE deducted and remitted during the year against the earnings of each employee.

New Employees and Leavers

When a new employee joins, begin deducting PAYE from their first salary. Obtain their TIN before processing their first payment. When an employee leaves, their final month's deduction should be remitted in the normal course, and their details should be updated in your annual return.

Under the new dual PAYE reporting framework introduced in the Nigeria Tax Act 2025, both the employer and the employee are required to file annual PAYE returns. Ensure your employees are aware of their own filing obligation.

Employee TINs

Every employee must have a valid Tax Identification Number. Employers are required to collect and record TINs for all staff. Without a valid TIN, withholding tax on the employee's income may apply at the full statutory rate.

WHAT OTHER PAYROLL DEDUCTIONS APPLY?

PAYE is one component of a compliant Nigerian payroll. Depending on your company's size and sector, the following statutory deductions may also apply:

Pension: Mandatory for employers with three or more employees. The employer contributes 10 percent and the employee contributes 8 percent of pensionable income. Pension remittances go to the employee's chosen Pension Fund Administrator within 7 days after salary payment.

NSITF: The Nigeria Social Insurance Trust Fund levy applies to all employers. It is calculated at 1 percent of total payroll and is remitted by the 16th of the following month.

NHF: The National Housing Fund requires employees earning N3,000 or more monthly to contribute 2.5 percent of basic salary. Remittance goes to the Federal Mortgage Bank within one month after deduction.

ITF: The Industrial Training Fund levy of 1 percent of annual payroll applies to employers with five or more employees or annual turnover of N50 million and above.

Each of these deductions has its own calculation method, remittance timeline, and regulatory body. Missing any of them creates a separate compliance exposure distinct from your PAYE obligations.

PENALTIES FOR NON-COMPLIANCE

Late PAYE remittance attracts a 10 percent annual fine plus interest. Under the Nigeria Tax Act 2025, stiffer penalties have been introduced for employers who under-deduct taxes or delay remittance. The NRS cross-references payroll records, bank transactions, and tax filings, meaning discrepancies are increasingly likely to be detected and assessed.

Persistent non-compliance can lead to tax evasion assessments, and in serious cases, prosecution.

COMMON MISTAKES TO AVOID

Using the old CRA calculation method after January 2026. The framework has changed and your payroll must reflect it.

Remitting to the wrong state. PAYE goes to the state where the employee is resident, not where your head office is located. If you have staff across multiple states, you are remitting to multiple state revenue authorities.

Failing to file nil returns when staff are on unpaid leave or no salary was paid in a given month.

Not obtaining employee TINs before processing their first payroll run.

Mixing up PAYE obligations with FIRS obligations. PAYE goes to the state SIRS. VAT and Company Income Tax go to the federal NRS. These are entirely separate obligations.

HOW IDARA HELPS

At Idara, we help Nigerian employers understand their tax obligations and set up compliant payroll processes. Whether you are hiring your first employee or cleaning up years of accumulated PAYE errors, our team can help you get to a position of full compliance.

Get started at goidara.com.