How to Calculate PAYE for Employees in Nigeria

PAYE means Pay As You Earn. It is the personal income tax deducted by an employer from an employee’s salary and remitted to the relevant State Internal Revenue Service.

If you run a business with employees in Nigeria, PAYE is not optional. Employers are expected to calculate, deduct and remit PAYE correctly every month.

Step 1: Determine the Employee’s Gross Salary

Start with the employee’s total annual gross salary. This may include:

• Basic salary
• Housing allowance
• Transport allowance
• Leave allowance
• Other taxable allowances
• Bonuses and commissions

For PAYE purposes, it is better to calculate tax on an annual basis and then divide the annual tax by 12 months.

Step 2: Deduct Allowable Contributions

Certain approved deductions may reduce the employee’s taxable income. Common examples include:

• Employee pension contribution
• National Housing Fund contribution, where applicable
• Other allowable deductions recognised under tax law

After deducting allowable items, the balance becomes the employee’s taxable income.

Step 3: Apply the PAYE Tax Rates

Nigeria uses a progressive tax system. This means that different portions of an employee’s taxable income are taxed at different rates.

Annual Taxable Income Band	Tax Rate
First ₦800,000	0%
Next ₦2,200,000	15%
Next ₦9,000,000	18%
Next ₦13,000,000	21%
Next ₦25,000,000	23%
Above ₦50,000,000	25%

Step 4: Divide the Annual PAYE by 12 Months

After calculating the annual PAYE tax, divide it by 12 to get the monthly PAYE deduction.

For example:

• Annual PAYE: ₦360,000
• Monthly PAYE: ₦360,000 ÷ 12
• Monthly PAYE deduction: ₦30,000

Step 5: Deduct PAYE From Salary and Remit to Tax Authority

Once PAYE is calculated, the employer should deduct it from the employee’s monthly salary and remit it to the relevant State Internal Revenue Service.

The employee receives net salary after deducting PAYE and other applicable deductions such as pension, loans, cooperative deductions or salary advances.

Common PAYE Mistakes Employers Should Avoid

• Using monthly salary directly without annualising the income
• Failing to deduct PAYE from employees
• Calculating PAYE manually without checking accuracy
• Not keeping payroll records
• Failing to remit deducted PAYE on time
• Mixing payroll deductions with business expenses

Why Proper PAYE Calculation Matters

Incorrect PAYE calculation can expose a business to tax liabilities, penalties, interest and compliance issues during tax audits.

It can also affect applications for Tax Clearance Certificate, payroll records, financial statement preparation and general business compliance.

Conclusion

To calculate PAYE for employees in Nigeria, determine the employee’s annual gross income, deduct allowable contributions, apply the relevant PAYE tax rates, and divide the annual tax by 12 months.

If you want to avoid errors, use our free Nigeria Payroll & PAYE Calculator to calculate payroll taxes instantly.