In short: take the year’s gross pay, take off pension, NHF and rent relief, then tax what is left band by band: the first ₦800,000 at 0%, then 15%, 18%, 21%, 23% and 25%. Divide by twelve for the monthly deduction.
What PAYE is
Pay As You Earn is income tax that the employer deducts from each person’s salary every month and pays to the tax authority of the state where the employee lives, such as the Lagos State Internal Revenue Service or the Rivers State Internal Revenue Service. The employer is responsible for getting it right and paying it on time, usually by the 10th of the following month.
Step 1: the year’s gross pay
Add up everything the person is paid in the year: basic salary, housing, transport and other allowances, and taxable benefits. PAYE is worked out on the yearly figure, even though it is deducted monthly.
Step 2: what comes off before tax
- Pension: the employee’s 8% contribution, worked out on basic, housing and transport. (The employer’s 10% is not part of the employee’s pay.)
- National Housing Fund: 2.5% of basic salary, for those who contribute.
- Rent relief: 20% of the rent the person pays in the year, up to ₦500,000. It replaces the old consolidated relief allowance.
- Some other items can also reduce taxable income, such as national health insurance contributions and certain life insurance premiums. Check with your accountant which apply.
Step 3: tax band by band
What is left is the taxable income. It is taxed in slices: each slice at its own rate, not the whole amount at the highest rate.
| Taxable income in the year | Rate |
|---|---|
| First ₦800,000 | 0% |
| Next ₦2,200,000 (up to ₦3 million) | 15% |
| Next ₦9,000,000 (up to ₦12 million) | 18% |
| Next ₦13,000,000 (up to ₦25 million) | 21% |
| Next ₦25,000,000 (up to ₦50 million) | 23% |
| Above ₦50,000,000 | 25% |
A worked example
Ada earns ₦500,000 a month: basic ₦250,000, housing ₦125,000, transport ₦75,000 and other allowances ₦50,000. She contributes to the NHF and pays ₦1,800,000 rent a year.
| Gross pay for the year (₦500,000 × 12) | ₦6,000,000 |
| Pension: 8% of ₦450,000 × 12 | − ₦432,000 |
| NHF: 2.5% of ₦250,000 × 12 | − ₦75,000 |
| Rent relief: 20% of ₦1,800,000 | − ₦360,000 |
| Taxable income | ₦5,133,000 |
| First ₦800,000 at 0% | ₦0 |
| Next ₦2,200,000 at 15% | ₦330,000 |
| Remaining ₦2,133,000 at 18% | ₦383,940 |
| Tax for the year | ₦713,940 |
| PAYE each month (÷ 12) | ₦59,495 |
Each month Ada’s payslip shows ₦500,000 gross, less ₦36,000 pension, ₦6,250 NHF and ₦59,495 PAYE: ₦398,255 take-home pay. You can check this, or any other salary, in our PAYE calculator.
Common mistakes
- Taxing the whole income at the top rate. Only the slice inside each band is taxed at that band’s rate.
- Working out pension on basic only. The 8% is on basic, housing and transport together.
- Forgetting rent relief. Ask staff to declare the rent they pay; it can lower their tax noticeably.
- Part months. Someone who joins on the 20th should not be taxed as if a small month were their normal pay. Work out the tax on the full month the pay stands for, then scale it down.
Doing it for everyone at once
For a handful of people, a spreadsheet works. For a company, the work is keeping it right every month: new starters, leavers, unpaid leave, loans, rate changes and remittances. Keelsum’s payroll does this calculation for every person, with rates your accountant confirms and can change, and puts the payslips on staff phones.
This guide explains the rules as we understand them for 2026. It is not tax advice: confirm figures with your accountant or the relevant tax authority.