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PAYE in Nigeria: What Your Employer Is Supposed to Be Doing With Your Tax

Taxidy
11 min read
PAYE in Nigeria: What Your Employer Is Supposed to Be Doing With Your Tax

PAYE stands for Pay As You Earn. It is the system your employer uses to deduct income tax from your salary every month before you even see the money. Under the Nigeria Tax Act 2025, which took effect January 1, 2026, the rules around how PAYE is calculated have changed significantly. Most employees have no idea whether their employer is getting it right. This article explains exactly what your employer is supposed to do, what correct PAYE looks like on your payslip, and what to do if something does not add up.

Quick Summary

  • PAYE is your employer's responsibility — they calculate, deduct, and remit your income tax to the government on your behalf every month
  • The first ₦800,000 of your annual income is tax-free — if you earn ₦66,667 a month or less, you should have zero PAYE deducted
  • The old Consolidated Relief Allowance is gone — your employer should no longer be using the old CRA formula from 2025 and earlier
  • Pension is deducted before PAYE is calculated — your 8% pension contribution reduces the income your tax is based on
  • Rent relief is now available to salaried employees — but only if you give your employer your tenancy agreement and rent receipts
  • If you are not salaried — PAYE does not apply to you directly, but you still owe income tax and must file it yourself

There is a question every Nigerian salary earner should be asking but almost nobody does.

Is my employer actually deducting the right amount of tax from my salary every month?

Most people assume the answer is yes. They see the PAYE line on their payslip, accept whatever number is there, and move on. But since the Nigeria Tax Act 2025 took effect on January 1, 2026, thousands of Nigerian employees have been having the wrong amount deducted from their salaries every single month. Some are paying more than they should. Others are paying less and building up a tax liability they do not know about.

This happens because many employers, especially smaller companies, have not updated their payroll systems to match the new law. They are still calculating PAYE using the old rules from the Personal Income Tax Act, which the NTA 2025 completely replaced. The result is that your payslip may look fine on the surface while quietly being wrong underneath.

Here is everything you need to know to check for yourself.

What PAYE Actually Is

PAYE stands for Pay As You Earn. It is a system where your employer calculates how much income tax you owe each month, deducts it directly from your salary before paying you, and remits it to the government on your behalf.

The key word here is on your behalf. Your employer is not keeping that money. They are acting as a collection agent for the Nigeria Revenue Service or your State Internal Revenue Service. The tax belongs to the government and your employer is legally required to send it there by the 10th of the following month.

This system exists because it is easier for the government to collect tax from a few thousand employers than from millions of individual employees. You never have to worry about setting money aside for tax or figuring out when to pay it. Your employer handles that. The catch is that if your employer gets the calculation wrong, you are the one who owes the difference.

What Changed Under the NTA 2025

Before January 1, 2026, your employer calculated your PAYE using a formula that included something called the Consolidated Relief Allowance. The CRA was a deduction of 20% of your gross income plus ₦200,000, applied automatically to every employee before tax was calculated.

That formula no longer exists.

The NTA 2025 abolished the CRA entirely and replaced it with a completely different structure. If your employer or their payroll software is still using the old CRA formula for any payroll run from January 2026 onward, every calculation is wrong. Some employees have been over-deducted since January 2026, meaning their employer effectively owes them money back. Others have been under-deducted and are building a tax debt without realising it.

Here is what the correct structure looks like now.

How Your PAYE Should Be Calculated in 2026

Your employer should be following these exact steps every month.

Step 1: Start with your gross income

Your gross income includes your basic salary, housing allowance, transport allowance, and any other regular allowances your employer pays you. Bonuses and commissions are only included if your employment contract specifically says they are part of your taxable emoluments.

Step 2: Subtract your pension contribution

Your 8% pension deduction is taken from your basic salary, housing allowance, and transport allowance only. It does not apply to your total gross pay unless your contract says otherwise. This pension amount is subtracted from your gross income before any tax is calculated.

Step 3: Subtract your rent relief if you have claimed it

If you pay rent and you have given your employer a copy of your tenancy agreement and rent payment receipts, your employer should deduct 20% of your annual rent from your taxable income, up to a maximum of ₦500,000 per year. This is not automatic. You have to actively claim it by providing the documentation.

Step 4: Subtract any other eligible reliefs

If you contribute to NHIS or NHF and your employer participates in those schemes, those contributions are also deductible before your tax is calculated. Not every employer runs these schemes so check your payslip to see which ones apply to you.

Step 5: Apply the progressive tax rates to what is left

Whatever income remains after all the deductions above is your chargeable income. Your employer applies the following annual rates to it:

  • The first ₦800,000 is taxed at 0%
  • The next ₦2,200,000 is taxed at 15%
  • The next ₦9,000,000 is taxed at 18%
  • The next ₦13,000,000 is taxed at 21%
  • The next ₦25,000,000 is taxed at 23%
  • Anything above ₦50,000,000 is taxed at 25%

The monthly PAYE deduction on your payslip is simply this annual figure divided by 12.

Not sure if your employer is calculating your PAYE correctly under the new rates? Taxidy can help you calculate what your actual tax liability should be so you know exactly what to expect on your payslip.

What a Correct Payslip Should Show

Let us use a real example. Adaora earns a total package of ₦3,000,000 per year broken down as ₦1,500,000 basic salary, ₦900,000 housing allowance, and ₦600,000 transport allowance. She pays ₦800,000 in annual rent and has submitted her tenancy agreement to HR.

Her employer's correct calculation looks like this:

Her pension is 8% of her basic, housing, and transport combined, which is 8% of ₦3,000,000, giving a pension deduction of ₦240,000 per year.

Her rent relief is 20% of ₦800,000 which is ₦160,000. Since ₦160,000 is below the ₦500,000 cap, the full ₦160,000 is deductible.

Her chargeable income is ₦3,000,000 minus ₦240,000 minus ₦160,000, which equals ₦2,600,000.

Applying the tax bands: the first ₦800,000 is taxed at 0%, leaving ₦1,800,000. That ₦1,800,000 falls in the 15% band, giving a tax of ₦270,000 per year.

Her monthly PAYE deduction should be ₦270,000 divided by 12, which is ₦22,500 per month.

If your employer is using the old CRA formula or not applying the new ₦800,000 zero rate correctly, the number on your payslip will be different from what it should be.

What Your Employer Is Legally Required to Do

Under the Nigeria Tax Act 2025 and the Nigeria Tax Administration Act 2025, your employer has specific legal obligations around PAYE. These are not optional.

Your employer must deduct the correct amount of PAYE from your salary every month based on the NTA 2025 rates. They must remit that money to the relevant State Internal Revenue Service by the 10th of the month following deduction. They must file an annual PAYE return with your state tax authority by January 31st every year, covering all deductions made across the previous year. They must give you a tax deduction card or equivalent documentation showing how much tax was deducted on your behalf during the year.

If your employer fails to deduct PAYE at all, the penalty under the NTAA is 40% of the amount that should have been deducted. If they deduct but fail to remit on time, the penalty is 10% of the unpaid amount plus interest at the Central Bank of Nigeria Monetary Policy Rate.

How to Check Your Own Payslip

You do not need to be an accountant to verify whether your PAYE is correct. Here is what to look for.

Check that your payslip shows your gross income, your pension deduction, your rent relief if you claimed it, your chargeable income after those deductions, and then the PAYE amount. If any of those line items are missing, your payslip is not giving you enough information to verify what is being calculated.

Check whether the first ₦800,000 of your annual income is being treated as tax-free. If you earn ₦66,667 a month or less, your PAYE should be zero. If it is not, something is wrong.

Check whether your employer is still showing a CRA line on your payslip. If you see a Consolidated Relief Allowance deduction anywhere on a payslip from January 2026 onward, your employer has not updated their payroll to the new law.

If you spot a discrepancy, the first step is to raise it with your HR or payroll team in writing. Ask them to show you the calculation behind your PAYE figure. If the discrepancy has been ongoing since January 2026, you may be entitled to a refund for months where you were over-deducted, or you may need to make up the difference for months where you were under-deducted.

You can also read our guide on how to read your bank statement for tax purposes which covers how income and deductions show up in your financial records more broadly.

What About Benefits Your Employer Gives You?

If your employer gives you a car, a phone, a laptop, or any other asset for personal use, the value of that benefit is taxable income under the NTA 2025. The law values the benefit at 5% of the cost of the asset per year. So if your employer bought you a car worth ₦10,000,000, the taxable value of that benefit is ₦500,000 per year and your employer should be including that in your PAYE calculation.

If your employer pays your rent directly, the full annual rent paid counts as taxable income in your hands. Many employees in this situation assume that employer-paid rent is a tax-free perk. Under the NTA 2025, it is not.

What If You Are Not a Salaried Employee?

PAYE only applies to people who earn a salary through a formal employer-employee relationship. If you fall outside that category, here is what applies to you instead.

If you are a freelancer, a self-employed professional, or a business owner, PAYE does not apply to you directly. Nobody deducts tax from your income at source. Instead, you are responsible for calculating your own tax, filing a self-assessment return with your State Internal Revenue Service, and paying whatever you owe by March 31st of the following year. Income earned in 2026 must be filed and paid by March 31, 2027.

If you work for multiple employers at the same time, each employer deducts PAYE based on the salary they pay you. But the combined income from both jobs may push you into a higher tax band than either employer is aware of. In that case, you are responsible for filing a self-assessment return at the end of the year to settle the difference.

If you receive income from a combination of a salary and other sources like rent you collect, dividends, or freelance work on the side, your employer handles the PAYE for your salary. But you are required to declare and pay tax on the additional income yourself through a self-assessment return.

Our guide on whether freelancers in Nigeria are overpaying tax covers the self-assessment process in full for anyone who falls into that category.

The One Thing to Do After Reading This

Pull out your most recent payslip and check three things. Is the PAYE line present and clearly labelled? Is your pension being deducted before your tax is calculated? And if you pay rent, has your employer applied the rent relief?

If any of those three things are missing or unclear, speak to your HR team in writing this week. The longer a wrong calculation runs, the larger the adjustment becomes.

Tax compliance in Nigeria is no longer something you can leave entirely in your employer's hands without checking. The NTA 2025 changed the rules and not every employer has caught up yet.

Taxidy is building the platform that helps every Nigerian understand their tax obligations clearly and stay compliant without the confusion. Join the waitlist to be the first to know when we launch.

Taxidy is built by Nigerians who understand exactly how confusing this system is.

Sources: Nigeria Tax Act 2025, Sections 4, 20, 30, 31, 32. Nigeria Tax Administration Act 2025. Mondaq Nigeria, Taxation of Employment Income Under the Nigerian Tax Reform Acts, March 2026. PaidHR Nigeria, Understanding Tax Computation in Nigeria, January 2026. TomFlims Nigeria, How Nigeria's New Tax Law Affects Your Payroll, March 2026. SmartSMS Solutions, Statutory Deductions in Nigerian Payroll, January 2026.

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