How Much PAYE Should My Employees Pay?

One common question many employers ask is: How much PAYE should my employees pay?

The answer depends on each employee’s income, salary structure, allowable deductions and applicable tax rates. In Nigeria, PAYE is not usually a flat amount for every employee. It is calculated based on the employee’s taxable income.

This means that two employees earning different salaries will usually pay different PAYE amounts.

What Is PAYE?

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

Instead of employees paying personal income tax directly at the end of the year, the employer deducts the tax monthly from salary and remits it on behalf of the employees.

Is PAYE the Same for All Employees?

No. PAYE is not the same for all employees.

The amount of PAYE an employee should pay depends on factors such as:

• Gross salary
• Basic salary
• Housing allowance
• Transport allowance
• Other taxable allowances
• Bonuses and commissions
• Pension contribution
• Other allowable deductions

An employee earning a higher taxable income will generally pay more PAYE than an employee earning a lower taxable income.

How PAYE Is Calculated in Nigeria

PAYE is usually calculated by following these basic steps:

1. Determine the employee’s annual gross income.
2. Identify taxable and non-taxable items.
3. Deduct allowable contributions and reliefs where applicable.
4. Apply the relevant personal income tax rates.
5. Divide the annual tax by 12 months to get the monthly PAYE deduction.

Employers should avoid guessing PAYE or using one fixed percentage for all employees.

Example of PAYE Calculation

Assume an employee earns a gross salary of ₦150,000 per month.

The annual gross salary will be:

• ₦150,000 × 12 months = ₦1,800,000 per year

PAYE will then be calculated after considering applicable deductions, reliefs and tax bands.

The final monthly PAYE is the annual PAYE divided by 12 months.

Because different employees have different salary structures and deductions, the most accurate way to determine PAYE is to calculate each employee separately.

Should PAYE Be Calculated Monthly or Annually?

PAYE is commonly deducted monthly from employees’ salaries, but the calculation is best done on an annual basis first.

After calculating the annual PAYE, the employer can divide the figure by 12 to determine the monthly PAYE deduction.

This helps reduce errors and ensures that the employee’s full annual income is considered properly.

Can a Low-Salary Employee Pay No PAYE?

Yes, depending on the applicable tax rules, reliefs and income level, some low-income employees may have little or no PAYE payable.

However, employers should not assume that an employee has no PAYE simply because the salary is low. The correct calculation should still be done.

What Happens If PAYE Is Under-Deducted?

If PAYE is under-deducted, the tax authority may assess the employer for the unpaid tax.

This may lead to:

• Additional tax liabilities
• Penalties
• Interest
• Tax audit queries
• Compliance problems

Employers should therefore ensure that PAYE is calculated correctly from the beginning.

What Happens If PAYE Is Over-Deducted?

If PAYE is over-deducted, employees may receive less net salary than they should.

This can create staff complaints, payroll disputes and reconciliation issues.

Accurate PAYE calculation protects both the employer and the employee.

Is PAYE Different From Pension Contribution?

Yes. PAYE and pension contribution are different deductions.

PAYE is personal income tax, while pension contribution is a retirement savings contribution made under the applicable pension arrangement.

Both may appear on the payroll schedule, but they serve different purposes and are remitted to different institutions.

Is PAYE Different From CAC Annual Returns?

Yes. PAYE is completely different from CAC Annual Returns.

CAC Annual Returns are filed with the Corporate Affairs Commission to update the statutory record of a company or business.

PAYE is a tax obligation relating to employees’ salaries and is handled through the relevant State Internal Revenue Service.

A company may file CAC Annual Returns and still have unpaid PAYE liabilities.

Payroll Records Employers Should Keep

To support PAYE compliance, employers should keep proper payroll records, including:

• Employee names and details
• Salary structure
• Monthly payroll schedule
• PAYE computation
• PAYE remittance receipts
• Pension deductions
• Loan or cooperative deductions
• Salary review letters

These records may be useful during tax audits, payroll reviews and Tax Clearance Certificate applications.

Why Employers Should Use a PAYE Calculator

PAYE calculation can become complicated when a business has several employees with different salary structures.

A PAYE calculator helps employers:

• Estimate payroll taxes quickly
• Reduce manual errors
• Calculate employee net salary
• Plan monthly payroll cost
• Maintain better payroll compliance

Conclusion

The amount of PAYE your employees should pay depends on their taxable income, salary structure, allowable deductions and applicable tax rates.

PAYE should not be guessed or calculated using one flat amount for all employees.

Employers should calculate PAYE for each employee separately and ensure that the correct amount is deducted and remitted to the relevant tax authority.

To make this easier, use our free Nigeria Payroll & PAYE Calculator to estimate employee PAYE, payroll deductions and net salary instantly.