Understanding PAYE: A Complete Guide for Nigerian Employees

Pay As You Earn (PAYE) is the most common form of taxation for salaried employees in Nigeria. If you're employed by a company or organization in Nigeria, your employer is required to deduct tax from your monthly salary and remit it to the Federal Inland Revenue Service (FIRS) on your behalf.

What is PAYE?

PAYE is a system of tax collection where employers deduct income tax directly from employees' salaries before paying them. This ensures that employees pay their taxes gradually throughout the year rather than in one lump sum.

Key Points About PAYE:

• Automatic Deduction: Your employer calculates and deducts tax from your salary each month
• Monthly Remittance: Employers must remit PAYE to FIRS by the 10th of the following month
• Based on Income: The amount deducted depends on your annual income
• Progressive Rates: Higher earners pay a higher percentage of their income in tax

PAYE Tax Rates for 2025

Under the Nigeria Tax Act 2025, the following tax bands apply:

1. First ₦300,000 - 7%
2. Next ₦300,000 - 11%
3. Next ₦500,000 - 15%
4. Next ₦500,000 - 19%
5. Next ₦1,600,000 - 21%
6. Above ₦3,200,000 - 24%

Example Calculation:

Let's say you earn ₦200,000 per month (₦2,400,000 annually):

Annual Tax Calculation:

• First ₦300,000 × 7% = ₦21,000
• Next ₦300,000 × 11% = ₦33,000
• Next ₦500,000 × 15% = ₦75,000
• Next ₦500,000 × 19% = ₦95,000
• Remaining ₦800,000 × 21% = ₦168,000

Total Annual Tax: ₦392,000 Monthly Deduction: ₦392,000 ÷ 12 = ₦32,667

Tax Reliefs and Deductions

The Nigeria Tax Act 2025 allows several reliefs that reduce your taxable income:

1. Consolidated Relief Allowance (CRA)

The CRA is the higher of:

• ₦200,000 + 20% of gross income, OR
• 1% of gross income

2. Pension Contribution

Your mandatory 8% pension contribution is tax-deductible, reducing your taxable income.

3. National Housing Fund (NHF)

The 2.5% NHF contribution is also deductible.

4. Life Assurance Premium

Premiums paid on life insurance policies qualify for relief.

5. National Health Insurance Scheme (NHIS)

Contributions to NHIS can be deducted from taxable income.

How to Check Your PAYE Deductions

Your monthly payslip should clearly show:

1. Gross Salary: Your total earnings before deductions
2. Tax Relief: Consolidated Relief Allowance and other reliefs
3. Taxable Income: Gross salary minus reliefs
4. PAYE Deducted: The actual tax amount deducted
5. Net Salary: Your take-home pay after all deductions

Common PAYE Mistakes to Avoid

1. Not Checking Your Tax Computation

Many employees never review their payslips. Always verify that your employer is calculating PAYE correctly.

2. Missing Tax Relief Claims

Ensure your employer is applying all applicable reliefs. The Consolidated Relief Allowance alone can save you thousands of naira.

3. Multiple Employers Without Declaration

If you work for multiple employers, you must declare this to ensure correct tax calculation across all sources.

4. Not Obtaining Tax Clearance Certificates

You need a Tax Clearance Certificate (TCC) for various transactions like visa applications, government contracts, and business registrations.

What If Your Employer Doesn't Deduct PAYE?

Some employers (especially smaller businesses) may not deduct PAYE from salaries. However, this doesn't exempt you from tax obligations.

Your Responsibilities:

• Register with FIRS for a TIN (Tax Identification Number)
• File annual tax returns
• Pay tax directly to FIRS
• Keep records of all income and tax payments

Penalties for Non-Compliance:

• 10% penalty on unpaid tax
• Interest charges on late payments
• Potential legal action for persistent default

Getting a Tax Clearance Certificate

To obtain a TCC:

1. Ensure all tax obligations are up-to-date

2. Apply through the FIRS portal (https://www.firs.gov.ng)

3. Provide required documentation:

   • Completed TCC application form
   • Evidence of tax payments
   • Bank statements
   • Valid ID

4. Pay application fee (₦10,000 - ₦25,000 depending on income level)

5. Certificate is usually issued within 7-14 working days

Key Takeaways

• PAYE is mandatory: All salaried employees must pay income tax
• Employers handle deduction: Your employer calculates, deducts, and remits your tax
• Tax reliefs reduce burden: Claim all applicable reliefs to minimize tax
• Verify computations: Always check your payslip for accuracy
• Keep records: Maintain copies of payslips and tax receipts
• Get a TCC: Obtain your Tax Clearance Certificate annually

Need Help?

If you have questions about your PAYE deductions or need assistance with tax compliance:

• Use our PAYE Calculator to estimate your tax
• Chat with our AI Tax Assistant for instant answers
• Consult a licensed tax professional for complex situations

Understanding PAYE is the first step to tax compliance and financial planning. By knowing how your tax is calculated and what reliefs you're entitled to, you can better manage your finances and avoid penalties.

Disclaimer: This article is for educational purposes only and does not constitute financial or legal advice. Tax laws can change, so always verify current rates and rules with FIRS or a qualified tax consultant.