PAYE explained

PAYE — pay as you earn — is not a separate tax. It is personal income tax, collected by your employer each month and paid to your state's revenue service on your behalf. Your employer works out the year's tax, divides by twelve, and deducts that from each payslip. Nothing about the calculation changes because it arrives monthly.

The computation runs in a fixed order. Get the order wrong and you get the answer wrong, because each step feeds the next.

Step 1 — gross emoluments

Start with everything your employer gives you for the job: basic salary, housing allowance, transport allowance, any other allowances, and bonuses.

Then add benefits in kind — things you receive instead of cash. Use of a company asset is valued at 5% of its cost per year. Employer-provided accommodation is valued at its annual value, but capped at 20% of your cash emoluments.

The total is your gross emoluments. This figure matters beyond tax: your pension contribution and your entitlements are usually pegged to parts of it.

Step 2 — take off what is deductible

These come off gross before any tax is calculated:

• Pension. 8% of the sum of your basic, housing and transport allowances — not of your whole gross. Your employer adds 10% on top, which is their cost, not yours, and is not taxed on you.
• NHF. 2.5% of basic salary. Compulsory if you work in the public sector, voluntary if you do not.
• NHIA contributions, life assurance premiums you pay, and mortgage interest on your own home.
• Rent relief — 20% of the annual rent you pay, capped at ₦500,000. The cap starts biting once your rent passes ₦2.5m a year, because 20% of ₦2.5m is exactly ₦500,000.

If you pay no rent, you get no rent relief. There is no substitute for homeowners. The Consolidated Relief Allowance, which used to give everyone a deduction whether they rented or not, was abolished on 1 January 2026. If you own your home, that is a straightforward loss — see what changed on 1 January 2026.

Step 3 — chargeable income

Gross, minus those deductions, is your chargeable income. This is the number the rate bands are applied to. It is not your salary, and it is usually a good deal lower.

Step 4 — run it through the bands

The 2026 bands are cumulative. Each slice of income is taxed at its own rate; no rate ever applies to your whole income.

| Chargeable income | Rate on that slice | | --- | --- | | First ₦800,000 | 0% | | Next ₦2,200,000 (to ₦3m) | 15% | | Next ₦9,000,000 (to ₦12m) | 18% | | Next ₦13,000,000 (to ₦25m) | 21% | | Next ₦25,000,000 (to ₦50m) | 23% | | Above ₦50,000,000 | 25% |

That first ₦800,000 is a zero band, not an allowance. The distinction matters: it is not deducted from your income and it does not reduce the slices above it. It simply means the first ₦800,000 of chargeable income is charged at 0%.

Add the tax from each band. Divide by twelve. That is the PAYE on your payslip.

Marginal rate vs effective rate

Your marginal rate is the rate on your next naira — the band your chargeable income reaches. Your effective rate is your total tax divided by your gross, which is what you actually pay.

They are never the same, and the gap is wide. Take someone earning ₦12,000,000 who pays ₦1,500,000 of rent and contributes to a pension and the NHF. Their chargeable income comes to ₦10,830,000 and their tax for the year to ₦1,739,400. That is a marginal rate of 18% — but an effective rate of 14.5%, because the ₦800,000 underneath was charged at nothing and the slices between it were charged at 15% and 18%.

A pay rise is taxed at your marginal rate, but it can never take your take-home pay down: only the slice above the threshold is taxed at the higher rate.

The PAYE calculator shows both figures, and the band ladder on it shows exactly how much of your income landed in each band.

When you owe nothing

Two rules can take you to nil.

If your gross is at or below the minimum wage of ₦70,000 a month, you are exempt outright. And separately, if your chargeable income lands inside the ₦800,000 zero band after deductions, the computation gives nil.

Under the old regime a nil computation did not mean a nil bill: minimum tax of 1% of gross income applied whenever it exceeded your computed liability. That rule is gone from 2026. A nil is now a real nil. The tax-exempt eligibility checker answers this in one step.

What your employer must do

Your employer deducts PAYE monthly and remits it to your state's revenue service — Lagos to LIRS, Kano to KIRS, and so on — by the 10th of the following month. They must also file an annual return of everyone's emoluments and PAYE by 31 January for the previous year.

Separately, you may still need to file your own personal income tax return by 31 March. PAYE does not always discharge your filing obligation, particularly if you have income from anywhere else. See your filing calendar.

Common errors worth checking on your payslip

• Pension computed on gross. It is 8% of basic + housing + transport, not 8% of everything.
• Rent relief claimed without rent. It requires rent actually paid.
• CRA still being deducted. It does not exist in 2026. If your payslip shows it, your payroll has not been updated.
• Bonuses taxed at a flat rate. They go into gross like anything else and run through the bands.

If a number here bears on your position, check it against the PIT rate reference and read the disclaimer before acting on it.