Split a package so that basic, housing and transport are all real, written components, because those three form the minimum base for pension under the Pension Reform Act (8% from the employee, 10% from the employer). Any other allowance is outside that minimum base unless you choose to include it. PAYE is charged on all cash pay, so the split changes tax only through the deductions it produces.
The same ₦400,000 package can put ₦72,000 a month into an employee's retirement account or ₦43,200, depending on how it is divided. That is why the structure belongs in the offer letter and not in someone's head.
What each component does
Basic salary is the core pay for the job and the most stable component. Many other things hang from it: overtime rates in many contracts, leave pay, gratuity schemes where they exist, and NHF where an employee opts in. Housing and transport allowances recognise the cost of living somewhere and getting to work. Basic, housing and transport together are the pension base, often called pensionable emoluments.
Utility, meal, medical, leave and "other" allowances count in gross pay and in taxable income. They are not in the statutory pension base unless you include them, and each naira you add to the base attracts your 10% share. There is no legal ratio between the components. A common pattern is about half basic, 30% housing and 20% transport, but that is practice, not law.
Two structures for the same ₦400,000
We ran both through the calculator on this site with no rent relief claimed.
| Item (monthly) | Structure A | Structure B |
|---|---|---|
| Basic | ₦200,000 | ₦120,000 |
| Housing | ₦120,000 | ₦80,000 |
| Transport | ₦80,000 | ₦40,000 |
| Other allowances | ₦0 | ₦160,000 |
| Pension base | ₦400,000 | ₦240,000 |
| Employee pension (8%) | ₦32,000 | ₦19,200 |
| Employer pension (10%) | ₦40,000 | ₦24,000 |
| Total into the RSA | ₦72,000 | ₦43,200 |
| PAYE | ₦48,740 | ₦51,044 |
| Take-home pay | ₦319,260 | ₦329,756 |
Structure B gives the employee ₦10,496 more take-home each month and saves the employer ₦16,000 a month in pension. But the RSA receives ₦28,800 a month less, which is ₦345,600 a year. Both structures meet the statutory minimum base, because basic, housing and transport are all in the base. The risk with B is the "other allowances" line: if it is really disguised basic pay, a regulator or auditor may question it, so ask PenCom or your PFA if you are unsure. A structure should reflect how pay actually works, not how to shave a statutory charge. The arithmetic of the pension split is in how to calculate pension contributions, and you can compare other salary levels in pension contribution examples by salary.
How the split affects tax
All cash allowances are part of gross income, so the split matters less for PAYE than people assume. What differs is the deductions. Chargeable income is annual gross less the employee's pension, less NHF if the employee has opted in, less rent relief. A larger pension deduction (Structure A) lowers taxable income, so the employee pays more pension but not as much more tax. Remember that the earlier NHF deduction is no longer compulsory for private-sector staff: if an employee opts in, it is 2.5% of basic (₦5,000 under A and ₦3,000 under B). See NHF for private-sector employees.
The word "housing" on a payslip earns no tax benefit. Rent relief is 20% of annual rent actually paid, capped at ₦500,000, claimed with evidence such as a tenancy agreement and receipts. The old Consolidated Relief Allowance no longer exists. See how to claim rent relief.
Design rules that hold up
- Start from total cost. Decide what the role is worth to the business including employer pension, NSITF and group life, then work back to gross.
- Keep the pension base honest. Include basic, housing and transport in full. Write down why any extra allowance is in or out.
- Limit components. Six or seven allowances confuse staff and multiply errors. Three to five is plenty for most small businesses.
- Put it in writing. List each component and monthly amount in the offer letter and contract. Our job offer letter template has a pay table for this.
- Review yearly. When the minimum wage, tax rules or prices change, revisit the structure. Do not add another allowance on top.
A worked design for a dispatcher
Segun owns a 10-person logistics company in Ibadan and wants to offer a dispatcher ₦250,000 a month. He splits it ₦125,000 basic, ₦75,000 housing and ₦50,000 transport, so the whole package sits in the pension base and the arithmetic is easy to explain.
Compare that with a business that keeps adding a fourth and fifth allowance to give raises without touching basic. After a few years nobody can say what the pensionable pay is, and every dispute begins with a search through old letters. For the employer side of the cost, see also the employer cost calculator.
Minimum wage and the structure
The national minimum wage is ₦70,000 a month and applies to employers with 25 or more employees. Moving money between components does not help: the test is the total pay. Employees on the minimum wage or less are exempt from PAYE. Check how to apply it in minimum wage compliance for employers.
Changing an existing structure
Restructuring pay changes the terms of employment. Without agreement it can breach contracts, particularly if any entitlement falls. Explain why, show each person the before and after figures, get signed acceptance and keep take-home pay at least equal to before. Never restructure to quietly shrink the pension base of existing staff. Bonuses and other extras are covered in PAYE on bonuses, 13th month and leave allowance, and a payslip walk-through is in how to read a Nigerian payslip.
Common questions
Can I pay one consolidated figure?
You can, but you still need to identify basic, housing and transport to calculate pension. A single number with no breakdown makes compliance hard to prove.
Are bonuses in the pension base?
Not by default. A bonus is usually outside the statutory minimum base unless your contract or policy includes it, though it is part of taxable income.
How should overtime be rated?
There is no flat statutory overtime rate for most private staff. Set it in the contract by reference to a stated component, usually basic.
This is general information. Confirm any design with a qualified professional.
