Every month, money disappears from your salary before it hits your account. Your payslip says "PAYE" next to some number, and you've probably wondered: how did they calculate that? Is it correct? Am I paying too much?
Let's break down exactly how PAYE works under the Nigeria Tax Act 2025 — the new tax bands, what gets deducted before tax is calculated, and real examples so you can check your own numbers.
What Is PAYE?
PAYE stands for Pay-As-You-Earn. It's the income tax your employer deducts from your salary every month and remits to the State Internal Revenue Service (SIRS) on your behalf. You don't pay it yourself — your employer handles it. But you should understand how it's calculated.
Your employer is legally required to deduct PAYE and remit it to the State IRS by the 10th of the following month. If they deduct from your January salary, it must reach the State IRS by February 10.
The New Tax Bands (NTA 2025)
Effective January 1, 2026, the new Personal Income Tax bands are:
| Annual Taxable Income | Tax Rate |
|---|---|
| First ₦800,000 | 0% (completely tax-free) |
| ₦800,001 – ₦3,000,000 | 15% |
| ₦3,000,001 – ₦12,000,000 | 18% |
| ₦12,000,001 – ₦25,000,000 | 21% |
| ₦25,000,001 – ₦50,000,000 | 23% |
| Above ₦50,000,000 | 25% |
The key insight: if your annual taxable income (after deductions) is ₦800,000 or less, you pay ZERO tax. This is the new tax-free threshold, and it's a game-changer for lower-income earners.
What Changed From the Old System?
The old system (pre-2026) used different rates (7% to 24%) with a Consolidated Relief Allowance (CRA) that made calculations unnecessarily complex. Here's the key difference:
| Aspect | Old System | New System (2026) |
|---|---|---|
| Tax bands | 7%, 11%, 15%, 19%, 21%, 24% | 0%, 15%, 18%, 21%, 23%, 25% |
| Tax-free threshold | CRA (20% of gross + higher of ₦200K or 1% of gross) | Flat ₦800,000 threshold |
| Maximum rate | 24% | 25% |
| Complexity | High (CRA calculation required) | Lower (clear bands, simple threshold) |
The new system is simpler to understand but the effective tax rate is different for different income levels. Lower earners generally pay less. Higher earners may pay slightly more at the top band.
Allowable Deductions Before Tax
Before the tax bands are applied, certain amounts are deducted from your gross income. These reduce your taxable income — meaning you pay tax on a smaller number.
Pension Contribution (Mandatory)
Under the Pension Reform Act, employees contribute 8% of their basic salary + housing allowance + transport allowance to their Retirement Savings Account (RSA). This is deducted before tax is calculated.
National Housing Fund (NHF)
2.5% of your basic salary goes to the National Housing Fund. Also deducted before tax.
National Health Insurance Scheme (NHIS)
Voluntary employee contributions to NHIS are tax-deductible.
Life Insurance Premiums
Premiums paid on life insurance policies are deductible from your taxable income.
Rent Relief
This is one people often miss: 20% of annual rent paid, up to a maximum of ₦500,000, can be deducted from your taxable income. If you pay ₦1,500,000 in annual rent, you can deduct ₦300,000 (20% of ₦1.5M). If you pay ₦3,000,000, you can deduct ₦500,000 (the cap).
You need to provide evidence of rent payment (receipt from landlord, bank transfer evidence) to claim this.
How PAYE Is Calculated: The Formula
Here's the step-by-step logic your employer's payroll system follows:
- Start with gross annual income (basic + housing + transport + other allowances)
- Subtract pension contribution (8% of basic + housing + transport)
- Subtract NHF (2.5% of basic)
- Subtract other deductions (NHIS, life insurance, rent relief)
- Result = Taxable Income
- Apply tax bands to the taxable income
- Divide annual tax by 12 = your monthly PAYE
Let's see this in action with real numbers.
Worked Example 1: ₦150,000/Month Salary
Aisha earns ₦150,000/month (₦1,800,000/year)
Salary structure: Basic ₦75,000 | Housing ₦37,500 | Transport ₦22,500 | Other ₦15,000
Step 1: Gross annual income = ₦1,800,000
Step 2: Pension (8% of basic + housing + transport)
= 8% × (₦75,000 + ₦37,500 + ₦22,500) × 12 = 8% × ₦1,620,000 = ₦129,600
Step 3: NHF (2.5% of basic)
= 2.5% × ₦75,000 × 12 = ₦22,500
Step 4: Taxable income
= ₦1,800,000 − ₦129,600 − ₦22,500 = ₦1,647,900
Step 5: Apply tax bands:
First ₦800,000 at 0% = ₦0
Remaining ₦847,900 at 15% = ₦127,185
Annual PAYE = ₦127,185
Monthly PAYE = ₦10,599
So Aisha takes home approximately ₦150,000 − ₦10,599 − ₦10,800 (pension) − ₦1,875 (NHF) = approximately ₦126,726/month after PAYE and statutory deductions.
Worked Example 2: ₦400,000/Month Salary
Emeka earns ₦400,000/month (₦4,800,000/year)
Salary structure: Basic ₦200,000 | Housing ₦100,000 | Transport ₦50,000 | Other ₦50,000
Step 1: Gross annual income = ₦4,800,000
Step 2: Pension (8% of basic + housing + transport)
= 8% × (₦200,000 + ₦100,000 + ₦50,000) × 12 = 8% × ₦4,200,000 = ₦336,000
Step 3: NHF (2.5% of basic)
= 2.5% × ₦200,000 × 12 = ₦60,000
Step 4: Rent relief (Emeka pays ₦2,000,000 annual rent)
= 20% × ₦2,000,000 = ₦400,000
Step 5: Taxable income
= ₦4,800,000 − ₦336,000 − ₦60,000 − ₦400,000 = ₦4,004,000
Step 6: Apply tax bands:
First ₦800,000 at 0% = ₦0
Next ₦2,200,000 (₦800,001 – ₦3,000,000) at 15% = ₦330,000
Remaining ₦1,004,000 (₦3,000,001 – ₦4,004,000) at 18% = ₦180,720
Annual PAYE = ₦510,720
Monthly PAYE = ₦42,560
Emeka's effective tax rate: ₦510,720 ÷ ₦4,800,000 = about 10.6% of gross income. Not the 18% headline rate — because of the ₦800K threshold and deductions.
Worked Example 3: ₦70,000/Month (Minimum Wage)
Favour earns ₦70,000/month (₦840,000/year)
Salary structure: Basic ₦35,000 | Housing ₦17,500 | Transport ₦10,500 | Other ₦7,000
Step 1: Gross annual income = ₦840,000
Step 2: Pension (8% of basic + housing + transport)
= 8% × (₦35,000 + ₦17,500 + ₦10,500) × 12 = 8% × ₦756,000 = ₦60,480
Step 3: NHF (2.5% of basic)
= 2.5% × ₦35,000 × 12 = ₦10,500
Step 4: Taxable income
= ₦840,000 − ₦60,480 − ₦10,500 = ₦769,020
Step 5: Apply tax bands:
₦769,020 is BELOW the ₦800,000 threshold → 0% tax
Annual PAYE = ₦0
Monthly PAYE = ₦0
Favour pays ZERO income tax. Anyone earning around the minimum wage or slightly above — once pension and NHF are deducted — falls below the ₦800,000 threshold and owes nothing in PAYE.
This is a significant improvement from the old system, where minimum wage earners still paid some tax after CRA calculations.
Key Insights From These Examples
The ₦800K Threshold Is Powerful
Everyone's first ₦800,000 of taxable income is completely free. This means:
- Minimum wage earners pay ₦0 in most cases
- Workers earning up to about ₦100,000/month may pay very little or nothing after deductions
- Even high earners benefit — their first ₦800K is still tax-free
Deductions Matter — A Lot
Pension, NHF, and especially rent relief can significantly reduce your tax bill. If you're not claiming rent relief and you're paying rent, you're leaving money on the table.
Your Effective Rate Is Lower Than the Band Rate
Because of the graduated bands and the ₦800K threshold, nobody actually pays 25% on their entire income. Even someone earning ₦60 million pays 25% only on the portion above ₦50 million. The effective rate is always lower than the top band you fall into.
What PAYE Doesn't Cover
PAYE only covers tax on the salary your employer knows about. If you have other income sources, PAYE alone doesn't make you fully compliant:
- Rental income from property you own
- Freelance/side hustle income
- Investment returns (dividends, interest above exempt thresholds)
- Business income from a side business
For these additional sources, you need to file a personal annual return declaring all income. PAYE handles your salary; the annual return handles everything else.
You Still Need to File an Annual Return
Important: Your employer deducting PAYE does NOT replace your obligation to file an annual Personal Income Tax return. PAYE handles the monthly deduction. The annual return is a separate filing that confirms your total income, validates the PAYE calculations, and makes you eligible for a Tax Clearance Certificate.
Think of it this way: PAYE is the tax payment. The annual return is the compliance record. You need both.
Is Your Employer Calculating Correctly?
Payroll errors happen more often than you'd think. Here are signs your PAYE might be wrong:
- Your taxable income is below ₦800,000 after deductions, but tax is still being deducted
- The PAYE amount doesn't change even after a salary adjustment
- Pension deductions aren't being subtracted before tax is calculated
- You're paying rent but rent relief isn't being applied
- The amount seems disproportionately high compared to colleagues at similar salary levels
If something looks off, ask your HR or payroll team to show you the computation. You have a right to understand how your PAYE is calculated.
Not sure your PAYE is correct?
Taxly can verify your employer's PAYE calculation and file your annual return — ensuring you're not overpaying and that you're getting all deductions you're entitled to.
Check your PAYE with Taxly →Quick Reference: PAYE at a Glance
| Monthly Salary | Annual Gross | Approximate Monthly PAYE* |
|---|---|---|
| ₦70,000 | ₦840,000 | ₦0 |
| ₦100,000 | ₦1,200,000 | ~₦2,500 |
| ₦150,000 | ₦1,800,000 | ~₦10,600 |
| ₦250,000 | ₦3,000,000 | ~₦23,000 |
| ₦400,000 | ₦4,800,000 | ~₦42,500 |
| ₦700,000 | ₦8,400,000 | ~₦95,000 |
| ₦1,000,000 | ₦12,000,000 | ~₦148,000 |
*Approximate — actual amount depends on salary structure, pension rates, and other deductions claimed.
Bottom Line
PAYE under the 2026 system is more straightforward than before. The ₦800,000 tax-free threshold means lower earners keep more of their money. Deductions like pension, NHF, and rent relief reduce your taxable income before the bands are applied. And the graduated rates mean your effective tax rate is always lower than the headline band rate.
But PAYE is only half the story. You still need to file an annual return to stay compliant and get your Tax Clearance Certificate. Don't let a year go by thinking PAYE alone is enough.