PAYE (Pay As You Earn) is the income tax you deduct from employees' salaries and pay to the state tax authority. The 2026 reforms changed the calculation completely: the Consolidated Relief Allowance is gone, there's a tax-free band, and rent relief is new. Here's how to do it by hand, with four worked examples. Or use our free PAYE calculator.
What are the PAYE tax bands in 2026?
Under the Nigeria Tax Act 2025, from 1 January 2026:
| Annual taxable income | Rate | Maximum tax in band |
|---|---|---|
| ₦0 – ₦800,000 | 0% | ₦0 |
| ₦800,001 – ₦3,000,000 | 15% | ₦330,000 |
| ₦3,000,001 – ₦12,000,000 | 18% | ₦1,620,000 |
| ₦12,000,001 – ₦25,000,000 | 21% | ₦2,730,000 |
| ₦25,000,001 – ₦50,000,000 | 23% | ₦5,750,000 |
| Above ₦50,000,000 | 25% | – |
Tax is progressive: each rate applies only to the part of income inside that band.
How do I calculate PAYE step by step?
- Annual gross pay: monthly gross (basic + housing + transport + other taxable allowances) × 12.
- Subtract pension: the employee's 8% contribution. Strictly this is 8% of basic + housing + transport.
- Subtract NHF if the employee is registered: 2.5% of basic salary.
- Subtract rent relief: 20% of the rent the employee actually pays each year, capped at ₦500,000. The employee should give you evidence.
- The result is taxable income. Apply the bands above.
- Divide by 12 for monthly PAYE.
Worked example 1: ₦500,000 a month, pays ₦1.2m rent
| Step | Amount |
|---|---|
| Annual gross (₦500,000 × 12) | ₦6,000,000 |
| Less pension (8%) | −₦480,000 |
| Less rent relief (20% × ₦1,200,000) | −₦240,000 |
| Taxable income | ₦5,280,000 |
| Tax: 0% on first ₦800,000 | ₦0 |
| 15% on next ₦2,200,000 | ₦330,000 |
| 18% on remaining ₦2,280,000 | ₦410,400 |
| Annual PAYE | ₦740,400 |
| Monthly PAYE | ₦61,700 |
| Monthly take-home (₦500,000 − ₦40,000 pension − ₦61,700) | ₦398,300 |
Worked example 2: ₦250,000 a month, no rent relief claimed
Annual gross ₦3,000,000 − pension ₦240,000 = taxable ₦2,760,000. Tax = 15% × (₦2,760,000 − ₦800,000) = ₦294,000 a year = ₦24,500 a month. Take-home = ₦250,000 − ₦20,000 − ₦24,500 = ₦205,500.
Worked example 3: minimum wage (₦70,000 a month)
Annual gross ₦840,000 − pension ₦67,200 = taxable ₦772,800, which is below ₦800,000. PAYE is ₦0. Take-home = ₦70,000 − ₦5,600 pension = ₦64,400.
Worked example 4: ₦950,000 a month, pays ₦2.4m rent
Annual gross ₦11,400,000 − pension ₦912,000 − rent relief ₦480,000 = taxable ₦10,008,000. Tax = ₦330,000 + 18% × (₦10,008,000 − ₦3,000,000) = ₦330,000 + ₦1,261,440 = ₦1,591,440 a year = ₦132,620 a month.
Who gets the PAYE?
PAYE goes to the State Internal Revenue Service of the state where the employee lives, not necessarily where your office is. If your Lagos company employs someone who lives in Ogun State, their PAYE goes to Ogun. Remit by the 10th of the following month, and file the annual employer return (Form H1) by 31 January.
Common PAYE mistakes
- Still applying the old Consolidated Relief Allowance. It was abolished from 2026.
- Giving rent relief without evidence. Keep a tenancy agreement or rent receipt on file for each claim.
- Taxing contractors through PAYE. Independent contractors are usually subject to withholding tax, not PAYE. See employee or contractor?
- Remitting to the wrong state. PAYE follows the employee's residence.
How BizBooks calculates PAYE
BizBooks payroll applies the 2026 bands, pension, NHF and rent relief for each person, produces payslips and a bank upload file, and puts the PAYE remittance on your tax calendar. See payroll, or try the free PAYE calculator.
Frequently asked questions
What is the tax-free threshold in Nigeria in 2026?
The first ₦800,000 of annual taxable income is taxed at 0% under the Nigeria Tax Act 2025.
Is the Consolidated Relief Allowance still used?
No. The CRA was removed from 1 January 2026. Rent relief (20% of annual rent, up to ₦500,000) and other specific reliefs such as pension and NHF apply instead.
Is pension deducted before PAYE is calculated?
Yes. The employee's pension contribution is deducted from gross income before applying the tax bands, which reduces PAYE.
Do minimum wage earners pay PAYE in 2026?
Generally no. At ₦70,000 a month, taxable income after pension is below the ₦800,000 tax-free threshold.
What is the highest PAYE rate in Nigeria?
25%, on annual taxable income above ₦50 million.