Updated with references to the Nigeria Tax Act, 2025 and the Nigeria Tax Administration Act, 2025

The new PAYE regime in Nigeria has changed both the substance of monthly payroll computation and the way tax compliance is documented. From 1 January 2026, employers and employees must apply the Nigeria Tax Act, 2025 (NTA) together with the Nigeria Tax Administration Act, 2025 (NTAA) when determining taxable income, filing returns and remitting tax.

This update is important for HR teams, payroll administrators and employees because several familiar concepts have been redesigned. The objective is not simply to change rates; it is to make the system more progressive, strengthen compliance and align reliefs more closely with actual living costs.

What PAYE means under the new law

Pay-As-You-Earn (PAYE) remains the system through which an employer deducts income tax from an employee’s salary and remits it to the relevant tax authority. The difference under the new regime is that the computation now starts from chargeable income as defined in the NTA, rather than from gross pay alone.

Under section 30(1) of the Nigeria Tax Act, 2025, chargeable income is the individual’s total income less the eligible deductions allowed by law. For payroll purposes, this means that every stage of the computation should be documented carefully, especially where the employee is claiming allowable reliefs or deductions.

Allowable deductions and rent relief

Section 30(2)(a) of the NTA lists the deductions that may be taken in computing chargeable income. These include statutory pension contributions, National Housing Fund contributions (NHF), National Health Insurance Scheme contributions (NHIS), qualifying interest on a loan for the development of an owner-occupied residential house, annuity or life insurance premium, and the new rent relief.

The most visible change for many employees is the rent relief under section 30(2)(a)(vi). An individual may deduct 20% of annual rent paid, capped at N500,000, whichever is lower. This places emphasis on proper rent documentation and supports taxpayers who actually incur housing costs.

Employers should encourage employees to maintain evidence of rent payments and other qualifying deductions. Where supporting documents are weak or unavailable, the tax authority may decline the claim.

The rules also make it clear that benefits-in-kind are part of taxable emoluments. Non-cash benefits such as company-provided accommodation, vehicles, or other taxable perks must be valued and brought into the PAYE computation where applicable.

Current PAYE bands and rates

The progressive personal income tax rates are set out in the Fourth Schedule to the Nigeria Tax Act, 2025. The schedule is designed to protect lower-income earners while applying increasing rates as income rises.

Annual taxable income Rate

Up to N800,000 0%

N800,001 to N3,000,000 15%

N3,000,001 to N12,000,000 18%

N12,000,001 to N25,000,000 21%

N25,000,001 to N50,000,000 23%

Above N50,000,000 25%

In practical terms, this means that employees with modest incomes benefit from a full tax-free threshold up to N800,000, while higher earners contribute more through a graduated scale. For payroll teams, the important task is to ensure the right income base is used after allowable deductions have been applied.

Who benefits from the reform?

The reform is most favourable to lower- and middle-income earners. Employees at or below the N800,000 annual threshold now fall outside PAYE. Those slightly above the threshold also benefit from the first band being taxed at 0%, which reduces overall liability compared with the old system.

Higher-income earners remain subject to PAYE, but the system is more structured and easier to apply. The practical effect is a more progressive tax model that aligns the tax burden more closely with the ability to pay.

Exemptions worth noting

The NTA also provides specific exemptions that are relevant to payroll and individual tax planning. In particular, section 58 exempts individuals who earn only the national minimum wage from income tax. This is a significant protection for the lowest-paid workers.

Other tax-exempt receipts and special cases should be considered only where they clearly fall within the Act. For payroll work, the safest approach is to rely on the statutory wording and the relevant tax authority guidance rather than assumptions from the old regime.

Filing obligations: employers versus employees

The administrative side of the law is just as important as the computational side. Under section 13 of the NTAA, every taxable person must file an annual return, whether or not tax is payable. The return should include the prescribed self-assessment, income from all sources, personal relief and tax computation, and, where relevant, audited accounts or a statement of accounts, together with evidence of tax paid.

Under section 14 of the NTAA, every employer must file a return with the relevant tax authority for all emoluments paid to employees not later than 31 January of each year in respect of the preceding year. The return must show each employee’s gross emoluments, allowances and benefits in kind, deductions, net emoluments and tax deducted.

Section 14 also makes it clear that the employer’s filing duty does not remove the employee’s own annual filing obligation. In other words, payroll reporting by the employer and personal reporting by the employee run side by side.

Where the tax authority issues a simplified return for low-income earners or persons in the informal sector, that framework will be under section 15 of the NTAA.

Where PAYE is paid?

For most employees, PAYE is administered by the relevant State Internal Revenue Service or the FCT Internal Revenue Service, usually in the jurisdiction where the employee is resident. The Nigeria Revenue Service handles specified categories, including certain non-residents and personnel employed in the Nigerian Army, the Nigerian Navy, the Nigerian Air Force, the Nigeria Police Force, and officers of the Nigerian Foreign Service.

Penalties for non-compliance

The new administrative framework is firm on compliance. Failure to register attracts an initial penalty of N50,000 plus N25,000 for each additional month of default. Failure to file, or filing incomplete or inaccurate returns, attracts an initial penalty of N100,000 plus N50,000 for each additional month of non-compliance. Failure to deduct tax attracts an administrative penalty of 40% of the amount not deducted.

Where tax deducted at source is not remitted, the law also contemplates liability for the unremitted amount, a 10% annual administrative penalty, and interest at the Central Bank of Nigeria monetary policy rate.

For payroll teams, the key control points are straightforward: confirm the employee’s tax residence, identify the right taxable income base, retain supporting documents for deductions, apply the correct rates, and file and remit on time. A payroll process that is well-documented is far less likely to create disputes during review or audit.

Conclusion

The new PAYE rules under the Nigeria Tax Act, 2025 and the Nigeria Tax Administration Act, 2025, represent a meaningful shift toward a more progressive and better documented tax system. For employees, the main headline is the higher tax-free threshold and the new rent relief. For employers, the priority is accurate payroll computation, timely remittance and disciplined annual filing.

Once the new rules are applied correctly, the payroll process becomes clearer, more defensible and easier to explain to employees. That is the real value of the reform: not just a different tax rate, but a more coherent and transparent system.