The new Nigerian Tax Act 2025 introduced changes to the computation of the pay-as-you-earn (PAYE) tax system for employees. As a result, we have curated this article to help with calculating it. Follow it step by step. To begin, let's explain what PAYE tax means.
Why Pay As You Earn?
Pay-as-you-earn tax is the tax liability paid by an employee to the state government monthly. If you do white collar job in Nigeria, then the term PAYE is not new to you. Your company will pay you net of your monthly pay. For example, you may receive a 344,000 net salary monthly, which simply means that gross amount and other deductions have been deducted to arrive at the net pay that goes to your bank account.
Paye tax is from the Personal Income Tax Act. In Nigeria, the Nigeria Tax Acts, 2025 contain PAYE laws. The second schedule of the Act explains how the tax liability for employees should be computed. Here is a template to help you with pay-as-you-earn computation.
Determining the gross pay
The first step in calculating personal income tax is to determine the gross pay. This is usually decided by management. Gross pay includes basic salary, transport allowance, wardrobe allowance, and feeding, among others. A percentage is attached to each of these allowances. The total allowance must be 100%.
Let's assume that the above applies. Management can decide that 60% should be basic, 20% transport, 10% each for wardrobe and feeding allowances. This is stated in the offer letter sent to you.
- Basic salary N3,066,000
- Transport N840,000
- Wardrobe N420,000
- Feeding N420,000
- Annual salary N4,200,000.
- The monthly salary will be N350,000
Deciding on Benefit in Kind (BIK)
Some employees, especially those at the management level, will enjoy some form of benefit in kind. Also, if the company has a staff lodge. This forms part of BIK.
In our example above the offer letter does not include a BIK. So, this is omitted in the computation. Note that BIK is part of gross salary.
Calculating the Deductions
Now, the gross salary is known to the employee according to the offer letter. The next step is to calculate the necessary deductions. This Nigeria Tax Act (2025) allows for four deductions. Which are life assurance, national health insurance scheme, national housing fund, and pension fund.
Each of the deductions has a percentage attached to it. Let's look at them below:
Life assurance is the actual life assurance paid by the employee. If the employer subscribes to this, he/she must alert the HR department of their company. So that the monthly actual life assurance is deducted.
The National Health Insurance Scheme (NHIS) is 5% of the basic salary. The National Housing Fund (NHF) is 2.5% of basic, and the pension fund is 8% of gross salary. An organisation might compute a pension as 8% of basic and transport allowances. But this is rarely done in practice.
Now, we will get the total deductions to be as follows:
- NHIS N153,300
- NHF N76,650
- Pension N336,000
- Total deductions are N565,950
For this employee, life assurance does not apply.
Download the automated PAYE MS Excel template
Consolidated Rent Relief Computation
A 5th deduction allowed by the law is the consolidated rent relief allowance. Stated as 20% of annual rent and a maximum of N500,000. That means an employee is entitled to 20 per cent of annual rent as a subsidy from the government. But limited to a maximum amount of N500,000.
This implies that your annual rent should be 2.5 million Naira or less. For our employee above, a total rent of 1.5 million Naira is applicable. Therefore, a rent relief of N300,000 is available for deduction. This is a total deduction of N865,950.
The subtraction of gross salary from the total deductions gives the taxable salary. In our case, this will be N3,334,050 (that is, N4,200,000 less N965,950).
Note that there is also a deduction for loan interest. If the loan interest is for building or renovation of the employee’s residential building. An employee who owns a home and does not pay rent is not entitled to the consolidated rent relief allowance.
Computation of tax liabilities
Now that we know the taxable income, the tax rate will be applied to get the tax liability of the employee. The tax payable is based on a progressive rate shown below:
- First N800,000 0%
- Next N2,200,000 15%
- Next N9,000,000 18%
- Next N13,000,000 21%
- Next N25,000,000 23%
- Balance N50,000,000 25%
This table shows the stages in tax liability computation. From the table, the employee has a taxable salary of N3,334,050, as computed above. This will fall within the N800,000 and N9,000,000 range. This is computed thus:
- The first N800,000 is not taxable.
- There will be a balance of N2,534,050 (N3,334,050 less N800,000). The balance is higher than N2,200,000. So multiple 15% by N2,200,000. This gives N330,000.
- The next stage is N9,000,000 at 18%. But the balance available is N334,050 (N2,534,050 less NN2,200,000). Multiple 18% on the balance of N334,050. This gives N60,129.
- A total tax payable of N390,129 (N330,000 + N60,129) is computed. If you divide this by 12, a monthly tax payment of N32,510.75 must be paid to the relevant tax authority.
What's next?
A good payroll (PAYE) tax computation template will automate the computation of tax liability for you. All you will need to do is input the gross salary and annual rent amount in the provided columns. The template shows the monthly net pay, tax payable, pension, NHIS, and NHF. If our Paye template is used for this employee, we will get the following monthly amounts:
- Net pay N270,326.75
- Tax payable N32,510.75
- Pension N28,000
- NHIS N12,775
- NHF N6,387.50
This gives a total of N350,000 monthly gross salary.
Our Paye tax computation automated template can help you with payroll management. Therefore, you do not need to outsource your payroll computation. But, do it from the comfort of your office with a single one-time payment fee. You can get access from here.