How to Calculate PAYE in Nigeria: A Step by Step Guide with the Latest FIRS Tax Brackets

Updated for the Nigeria Tax Act 2025, effective January 2026

If you work in Nigeria and earn a salary, you have probably noticed that the amount credited to your account is never the same as your gross pay. That gap is mostly PAYE. And with the new tax rules that took effect in January 2026, plenty of people are confused about how much tax they should actually be paying.

The good news is that the new system is friendlier to lower income earners. The not so good news is that the calculation still trips people up. This guide walks you through the entire process, step by step, using the current tax bands.

What Exactly Is PAYE?

PAYE stands for Pay As You Earn. It is the system your employer uses to deduct personal income tax from your salary every month and remit it to the tax authorities. You do not have to file a separate return as a salaried worker, because your employer handles the deduction at source.

But here is the important part: PAYE is not calculated on your gross salary. It is calculated on your taxable income, which is what remains after certain deductions and reliefs have been applied. If your payroll officer is doing their job properly, you should be paying less tax than you would if they simply applied the rates to your full salary.

The Current Tax Brackets You Should Know

The Nigeria Tax Act 2025, which replaced the old Personal Income Tax Act, introduced a new set of progressive tax bands. These became effective on 1 January 2026. Here is what they look like on an annual basis:

If you earn ₦800,000 or less per year, you pay zero PAYE. That is roughly ₦66,666 per month. This is a significant change from the old system, which started taxing income from the first naira.

For anyone earning above that threshold, the bands work in layers. You do not apply a single rate to your entire income. Each portion of your income falls into a specific band, and only that portion is taxed at the corresponding rate. This is what makes the system progressive.

Deductions That Reduce Your Taxable Income

Before you apply the tax bands, you need to subtract the deductions you are legally entitled to. These are not automatic for every worker, so you may need to make sure your employer has the right information on file.

• Rent relief: You can deduct 20% of your annual rent, capped at ₦500,000. If you pay ₦2 million in rent per year, 20% is ₦400,000, so that is what you deduct. If you pay ₦3 million, 20% would be ₦600,000, but the cap brings it down to ₦500,000. You need to declare the actual rent you pay to benefit from this.
• Pension contribution: Your mandatory 8% contribution to your Pension Fund Administrator is deductible. The employer's 10% contribution is not added to your taxable income.
• National Housing Fund (NHF): If you earn ₦3,000 or more per month, your 2.5% NHF contribution is fully deductible.
• NHIS contribution: Your National Health Insurance Scheme contribution is also deductible.
• Life insurance premiums: Premiums on eligible life insurance policies can be deducted, but you usually need to provide documentation to your employer.
• Housing loan interest: Interest paid on a loan taken for an owner occupied home is deductible.

Step by Step: How to Calculate Your PAYE

Let us walk through the calculation with a real example. Say your annual gross salary is ₦6,000,000. That works out to ₦500,000 per month.

Step 1: Determine your annual gross income

This includes your basic salary, housing allowance, transport allowance, and any other taxable allowances or benefits. In this example, it is ₦6,000,000.

Step 2: Add up your allowable deductions

Let us assume the following:

• Annual rent: ₦1,500,000, so rent relief is 20% of that, which is ₦300,000.
• Annual pension contribution (8% of basic, housing, and transport allowance): ₦480,000.
• Annual NHF contribution (2.5% of basic salary): ₦90,000.

Total deductions: ₦300,000 + ₦480,000 + ₦90,000 = ₦870,000.

Step 3: Calculate your taxable income

Subtract the deductions from your gross income.

₦6,000,000 minus ₦870,000 = ₦5,130,000.

This is the amount that the tax bands will be applied to.

Step 4: Apply the tax bands layer by layer

Now you break the taxable income into the bands:

• First ₦800,000 is taxed at 0%. Tax on this layer: ₦0.
• Next ₦2,200,000 is taxed at 15%. Tax on this layer: ₦2,200,000 × 0.15 = ₦330,000.
• The remaining ₦2,130,000 falls into the next band, which is ₦9,000,000 taxed at 18%. Tax on this layer: ₦2,130,000 × 0.18 = ₦383,400.

Total annual PAYE: ₦0 + ₦330,000 + ₦383,400 = ₦713,400.

Step 5: Work out your monthly PAYE

Divide the annual tax by 12.

₦713,400 ÷ 12 = ₦59,450.

So on a gross salary of ₦500,000 per month, your PAYE deduction should be ₦59,450 per month, assuming all the deductions above are properly captured.

What Changed from the Old System?

Under the old Personal Income Tax Act, the first ₦300,000 was taxed at 7%, and the highest rate was 24%. The new system eliminates tax entirely on the first ₦800,000, which is a big relief for low income earners.

For middle income earners, the effective tax rate is generally lower under the new bands. For high earners, the rates are slightly higher in some cases, but the progressive structure means you only pay the higher rate on the portion of income that falls into that band.

The removal of the Consolidated Relief Allowance has been a point of confusion. Some people think it means they are worse off, but the new specific deductions, especially the rent relief and the tax free threshold, often make up for it. The key is making sure your deductions are actually applied.

Tips to Make Sure You Are Not Overpaying

• Check your payslip every month. Look at the PAYE deduction and see if it roughly matches what you calculate using the steps above. A small difference is normal due to rounding, but a big gap is not.
• Submit your rent declaration. The rent relief is not automatic. Your employer needs to know how much rent you pay. If you have not submitted this, you are likely paying more tax than you should.
• Confirm your pension and NHF contributions. These should appear as deductions on your payslip. If they do not, your taxable income is higher than it should be.
• Review your tax clearance certificate. If you apply for one, check that all your reliefs are reflected. It is a useful way to catch payroll errors.

For a deeper look at how pension contributions affect your take home pay, you might find our guide on understanding pension deductions in Nigeria helpful.

Frequently Asked Questions

Do I still need to file a tax return if PAYE is deducted from my salary?

In most cases, no. Your employer is responsible for remitting PAYE on your behalf. However, if you have additional income outside your salary, or if you want to claim deductions that your employer has not applied, you may need to file a return.

Is the ₦800,000 tax free threshold per year or per month?

It is per year. That works out to about ₦66,666 per month. If your annual income is ₦800,000 or less, your PAYE should be zero.

What happens if my employer deducts too much PAYE?

You can request a refund through the tax authorities if you have overpaid. The process involves providing evidence of the overpayment, such as payslips and a computation showing the correct amount. It is easier to catch the error early and have payroll correct it going forward.

Does the new tax law affect freelancers and self employed people?

This guide focuses on PAYE for salaried employees. Self employed individuals and freelancers are taxed under a different framework, though the tax bands are the same. Their calculation involves business income and expenses rather than salary deductions.

The Bottom Line

Calculating PAYE in Nigeria does not have to be complicated. Once you understand the new tax bands and the deductions you are entitled to, you can work out your expected tax in a few minutes. The key is to make sure your employer has the information they need to apply your reliefs correctly.

If something does not add up, ask questions. Your payslip is not a mystery document. It is a record of how your salary is being treated, and you have every right to understand it.

This article is for general information only and does not constitute tax advice. Tax rules can change, and individual circumstances vary. For advice specific to your situation, consult a qualified tax professional or visit the FIRS website for the latest guidance.