Pay As You Earn (PAYE) tax is a mandatory income tax deducted from employees’ salaries in Nigeria. It is regulated by the Personal Income Tax Act (PITA) and administered by state tax authorities. This guide explains how PAYE is calculated, including tax reliefs and allowances, with practical examples.
Please note that this is under Old Tax laws. There is now New PAYE Computation Under the Nigeria Tax Act (NTA) 2025
Understanding PAYE in Nigeria
PAYE is a progressive tax, meaning the percentage deducted increases as income rises. The tax applies to both private and public sector employees.
Who Pays PAYE?
- All employees earning above the minimum taxable threshold
- Self-employed individuals who fall under the personal income tax system
Who Collects PAYE?
- The Federal Inland Revenue Service (FIRS) for residents of the Federal Capital Territory and non-residents.
- State Internal Revenue Services (SIRS) for residents in each state.
Personal Income Tax Rates in Nigeria
PAYE is calculated based on the following tax bands:
| Annual Income (₦) | Tax Rate (%) |
| First ₦300,000 | 7% |
| Next ₦300,000 | 11% |
| Next ₦500,000 | 15% |
| Next ₦500,000 | 19% |
| Next ₦1,600,000 | 21% |
| Above ₦3,200,000 | 24% |
Reliefs and Allowances Applicable to PAYE
Before applying the tax rates, employees are entitled to deductions that reduce their taxable income. These include:
Consolidated Relief Allowance (CRA)
The CRA is calculated as ₦200,000 or 1% of gross income (whichever is higher) plus 20% of gross income.
Tax-Exempt Allowances
Certain allowances are exempt from tax, such as:
- National Housing Fund (NHF) contributions – 2.5% of basic salary
- Pension Contributions – 8% of basic salary, housing, and transport allowances
- National Health Insurance Scheme (NHIS) contributions
- Life insurance premiums
Step-by-Step Calculation of PAYE
Example 1: Employee Earning ₦3,000,000 Annually
Step 1: Calculate Consolidated Relief Allowance (CRA)
Gross Income = ₦3,000,000
CRA = ₦200,000 + (20% of ₦3,000,000)
CRA = ₦200,000 + ₦600,000 = ₦800,000
Step 2: Calculate Taxable Income
Taxable Income = Gross Income – CRA – Pension (8% of ₦3,000,000)
Pension = 8% × 3,000,000 = ₦240,000
Taxable Income = ₦3,000,000 – ₦800,000 – ₦240,000 = ₦1,960,000
Step 3: Apply PAYE Tax Rates
| Tax Band (₦) | Tax Rate (%) | Tax Payable (₦) |
| First ₦300,000 | 7% | ₦21,000 |
| Next ₦300,000 | 11% | ₦33,000 |
| Next ₦500,000 | 15% | ₦75,000 |
| Next ₦500,000 | 19% | ₦95,000 |
| Remaining ₦360,000 | 21% | ₦75,600 |
Total PAYE Tax = ₦21,000 + ₦33,000 + ₦75,000 + ₦95,000 + ₦75,600 = ₦299,600 annually
PAYE Monthly Deduction = ₦299,600 ÷ 12 = ₦24,967 per month
Penalties for Non-Compliance
Employers are required to remit PAYE tax monthly to the appropriate tax authority. Failure to comply results in:
- A penalty of 10% of unpaid tax
- Interest of 19% per annum
- Possible legal action
Key Takeaways
- PAYE tax is calculated after deducting CRA and tax-exempt allowances.
- The tax is progressive, with rates ranging from 7% to 24%.
- Employers must remit PAYE monthly to avoid penalties.
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