13th Month Salary and Bonuses: How PAYE Tax Applies in Nigeria

How PAYE applies to 13th month salary, bonuses, overtime, and arrears in Nigeria under the NTA 2025. Two calculation methods, worked examples, and payroll tips.

Every December, the same question floods Nigerian payroll departments: how do you calculate PAYE on a 13th month salary or annual bonus? The answer under the NTA 2025 is straightforward in principle — bonuses and extra payments are taxable employment income, added to your annual gross and taxed through the same progressive bands as your regular salary. But in practice, the calculation method matters enormously. Getting it wrong can mean over-taxing employees in December (creating refund headaches in January) or under-taxing them (creating compliance exposure for the employer).

This guide covers the correct treatment of every type of extra payment — 13th month salary, performance bonuses, overtime, arrears, and gratuity — with worked examples showing the exact PAYE impact at different salary levels.

Is 13th Month Salary Mandatory in Nigeria?

No. Unlike countries such as the Philippines, Brazil, or the Netherlands, Nigeria has no statutory requirement for employers to pay a 13th month salary. It is entirely at the employer’s discretion. Many Nigerian companies — particularly multinationals, banks, and large corporates — pay a 13th month salary or annual bonus as part of their compensation structure, but it is a contractual or customary benefit, not a legal obligation.

Some companies pay a fixed 13th month (equal to one month’s basic salary or gross salary). Others pay a variable performance bonus tied to individual or company targets. Some pay both. The tax treatment is the same regardless of how the payment is labelled or structured — it is all employment income subject to PAYE.

The Tax Principle: All Employment Income Is Taxable

Under the NTA 2025, the PAYE base includes all forms of remuneration. Section 4 defines taxable income broadly to cover salaries, wages, bonuses, fees, commissions, overtime, leave pay, and any other payment arising from employment. There is no exemption for bonuses, 13th month payments, or performance incentives. If the payment arises from the employment relationship, it is taxable.

This means your 13th month salary is taxed the same way as your 1st through 12th month salary — it is part of your total annual income, subject to the same deductions and the same progressive tax bands.

Two Methods for Calculating PAYE on Bonuses

There are two approaches that Nigerian employers use. One is technically correct. The other is administratively simpler but can produce different (usually slightly higher) results.

Method 1: Annual Recalculation (Correct Method)

This is the technically accurate approach. You recalculate PAYE on the full annual income including the bonus, then determine the additional tax attributable to the bonus.

Step 1: Calculate the employee’s annual gross income including the bonus. This is the regular annual salary plus the bonus amount.

Step 2: Recalculate all deductions (pension, rent relief, NHF, etc.) based on the revised annual gross. Note: bonuses are generally not pensionable — pension is calculated only on Basic + Housing + Transport. So the pension deduction does not change unless the bonus is structured as an increase to basic salary.

Step 3: Determine the new chargeable income (revised annual gross minus deductions).

Step 4: Apply the NTA 2025 tax bands to the new chargeable income to get the total annual PAYE.

Step 5: Subtract the PAYE already deducted during the year (January to November, or whatever period has already been processed). The difference is the PAYE on the bonus.

This method ensures the employee pays exactly the right amount of tax for the year — no more, no less. The bonus is effectively taxed at the employee’s marginal rate, and the progressive band structure is applied to the full annual income including the bonus.

Method 2: Combined Monthly Calculation (Simpler Method)

Many employers, particularly smaller companies without sophisticated payroll software, use a simpler approach: add the bonus to the month’s regular salary and calculate PAYE on the combined figure as if it were the monthly salary.

For example, if an employee earns ₦400,000 per month and receives a ₦400,000 bonus in December, the employer treats December as a month with ₦800,000 gross pay. The employer then calculates PAYE as if the employee earns ₦800,000 every month (₦9,600,000 annually), rather than ₦400,000 for 11 months plus ₦800,000 for one month (₦5,200,000 annually).

This method is administratively simpler but almost always produces a higher PAYE for the bonus month because it artificially inflates the implied annual income, pushing more of the income into higher tax bands. The employee ends up over-taxed for the year, which then requires a reconciliation or refund — creating extra work for payroll and frustration for the employee.

Recommendation: Use Method 1. It is more work upfront but produces the correct result and avoids year-end reconciliation headaches. If your payroll software supports annual recalculation, configure it to handle bonuses this way automatically.

Worked Example: ₦350,000/Month Employee With ₦350,000 Bonus

Let us walk through both methods to see the difference.

Employee profile: Adeola earns ₦350,000/month (₦4,200,000 annual gross). Basic 60% (₦2,520,000), Housing 20% (₦840,000), Transport 20% (₦840,000). Annual rent: ₦1,200,000. She receives a ₦350,000 bonus in December.

Method 1: Annual Recalculation

Without bonus:

• Annual gross: ₦4,200,000
• Pension (8% of ₦4,200,000): ₦336,000
• Rent relief (20% of ₦1,200,000): ₦240,000
• Chargeable income: ₦3,624,000
• PAYE: ₦800,000 × 0% + ₦2,200,000 × 15% + ₦624,000 × 18% = ₦0 + ₦330,000 + ₦112,320 = ₦442,320

With bonus (revised annual gross ₦4,550,000):

• Pension: ₦336,000 (unchanged — bonus is not pensionable)
• Rent relief: ₦240,000 (unchanged)
• Chargeable income: ₦4,550,000 − ₦336,000 − ₦240,000 = ₦3,974,000
• PAYE: ₦800,000 × 0% + ₦2,200,000 × 15% + ₦974,000 × 18% = ₦0 + ₦330,000 + ₦175,320 = ₦505,320

PAYE on the bonus: ₦505,320 − ₦442,320 = ₦63,000

If Adeola received ₦442,320 ÷ 12 = ₦36,860 per month in PAYE deductions for January to November (₦405,460 total), the December PAYE deduction would be ₦505,320 − ₦405,460 = ₦99,860 — covering both the regular December salary and the bonus.

Method 2: Combined Monthly

December gross: ₦350,000 + ₦350,000 = ₦700,000. Implied annual: ₦8,400,000.

• Pension (8% of ₦8,400,000): ₦672,000 (incorrectly inflated)
• Rent relief: ₦240,000
• Chargeable income: ₦7,488,000
• PAYE: ₦0 + ₦330,000 + ₦4,488,000 × 18% = ₦330,000 + ₦807,840 = ₦1,137,840 annual
• Monthly PAYE for December: ₦1,137,840 ÷ 12 = ₦94,820

Compared to Method 1’s ₦99,860 for December (which includes catching up for the full year), Method 2’s ₦94,820 might look lower for the month — but the annual total under Method 2 would be ₦405,460 (Jan–Nov) + ₦94,820 (Dec) = ₦500,280 vs the correct annual total of ₦505,320. The employee is under-taxed by ₦5,040, which must be reconciled.

The exact figures depend on how the employer handles the pension recalculation and annual true-up. The point is that Method 2 produces an approximate result that needs correction, while Method 1 produces the correct result the first time.

Verify your own figures with our PAYE Calculator.

Worked Example: Higher Earner — ₦1,000,000/Month With ₦2,000,000 Bonus

The impact is more significant at higher income levels because the bonus pushes more income into higher tax bands.

Profile: Chidi earns ₦1,000,000/month (₦12,000,000 annual). Basic 50% (₦6,000,000), Housing 25% (₦3,000,000), Transport 15% (₦1,800,000), Others 10% (₦1,200,000). Annual rent: ₦3,000,000. He receives a ₦2,000,000 performance bonus in December.

Without bonus:

• Pension (8% of ₦10,800,000): ₦864,000
• Rent relief (capped): ₦500,000
• NHF (2.5% of ₦6,000,000): ₦150,000
• Chargeable income: ₦12,000,000 − ₦864,000 − ₦500,000 − ₦150,000 = ₦10,486,000
• PAYE: ₦0 + ₦330,000 + (₦7,486,000 × 18%) = ₦0 + ₦330,000 + ₦1,347,480 = ₦1,677,480

With ₦2,000,000 bonus (revised annual gross ₦14,000,000):

• Pension: ₦864,000 (unchanged — bonus not pensionable)
• Rent relief: ₦500,000 (unchanged)
• NHF: ₦150,000 (unchanged)
• Chargeable income: ₦14,000,000 − ₦864,000 − ₦500,000 − ₦150,000 = ₦12,486,000
• PAYE: ₦0 + ₦330,000 + (₦9,000,000 × 18%) + (₦486,000 × 21%) = ₦0 + ₦330,000 + ₦1,620,000 + ₦102,060 = ₦2,052,060

PAYE on the ₦2,000,000 bonus: ₦2,052,060 − ₦1,677,480 = ₦374,580

The effective tax rate on the bonus is 18.7%. Notice that a portion of the bonus is taxed at 21% because it pushed Chidi’s chargeable income past the ₦12,000,000 threshold into the fourth band. Without the bonus, he stayed entirely within the 18% band. This is the progressive system at work — the bonus is effectively taxed at the marginal rate, not a flat rate.

How Other Extra Payments Are Taxed

Overtime

Overtime payments are taxable employment income. If overtime is paid monthly, add it to the gross pay for that month and recalculate PAYE using Method 1 (annual recalculation). If overtime is irregular, the annual recalculation method is particularly important to avoid over-taxation in the months when overtime is paid.

Salary Arrears

If an employee receives salary arrears (back pay for a salary increase applied retroactively), the technically correct approach is to allocate the arrears to the periods they relate to and recalculate PAYE for those periods. The cumulative additional tax is collected in the month the arrears are paid.

Simply adding the entire arrears lump sum to the current month and taxing the combined figure pushes the employee artificially into higher bands for that month, resulting in over-taxation. For large arrears amounts, this distortion can be substantial.

Leave Allowance

Leave allowance is part of annual gross income and is taxable. It is typically included in the initial annual PAYE computation. If it is paid as a lump sum in the month the employee takes leave, it should already be factored into the annual calculation — no separate treatment is needed unless the leave allowance was not included in the original annual gross projection.

Gratuity

This is a major change under the NTA 2025. Gratuity was previously tax-exempt up to certain thresholds. Under the new law, gratuity is taxable in the year it is received. If an employee receives a gratuity payment upon leaving the company, the payment is added to their income for that year and taxed at the applicable progressive rates. This can result in a significant tax hit for employees receiving large gratuity payments — particularly those who assumed the payment would be tax-free based on the old rules.

The only exemption remaining is for compensation for loss of employment or personal injury up to ₦50,000,000. If a gratuity is structured as compensation for loss of employment and falls within this threshold, it may qualify for the exemption. However, routine gratuity paid to an employee who is retiring or resigning voluntarily is taxable.

Benefits in Kind

Employer-provided benefits such as company cars (valued at 5% of cost per year), rent-free accommodation (valued at 20% of gross income), and other perks are taxable and must be included in the employee’s gross income for PAYE computation. These are not “extra payments” in the traditional sense, but they function the same way — they increase taxable income and therefore increase PAYE.

The Pension Question: Is the Bonus Pensionable?

No. Under the NTA 2025 and the Contributory Pension Scheme, pensionable emoluments are defined as Basic Salary + Housing Allowance + Transport Allowance. Only these three components attract the 8% employee pension contribution. Bonuses, 13th month payments, overtime, leave allowances, and other irregular payments are not pensionable — they do not increase the pension deduction.

This means that when you recalculate PAYE for the bonus month, the pension deduction stays the same as it was before the bonus. The bonus adds directly to chargeable income without being reduced by an additional pension contribution. This is a point that payroll systems sometimes get wrong — particularly when configured to calculate pension as a percentage of gross pay rather than of the three pensionable components.

If your compensation package is structured differently and you want to understand the optimal split between pensionable and non-pensionable components, try our Salary Optimizer.

What Employees Should Check on Their December Payslip

December is when most 13th month payments and bonuses land. Here is what to verify:

• The bonus is shown as a separate line item. It should be clearly identified, not buried within the regular salary. This makes it easier to verify the tax calculation.
• PAYE is higher than usual. If you received a bonus, your December PAYE should be noticeably higher than a normal month. If it is the same as November, your employer may not have included the bonus in the tax calculation — which means an under-deduction that will need to be corrected later.
• Pension has not increased. Your pension deduction should be the same as any other month. If it jumped up in December, your employer may be incorrectly treating the bonus as pensionable.
• The annual total makes sense. Add up all 12 months of PAYE deductions on your payslips. Compare the total to what our PAYE Calculator shows for your annual gross (including the bonus). If there is a significant difference, raise it with HR before year-end reconciliation.

What HR and Payroll Teams Must Get Right

• Use the annual recalculation method. Configure your payroll software to add the bonus to annual gross, recalculate annual PAYE, and deduct the difference in the bonus month. This is the only method that produces the correct result without requiring a year-end true-up.
• Do not calculate pension on bonuses. Pension is 8% of Basic + Housing + Transport only. Bonuses, overtime, leave pay, and other irregular payments are excluded from the pension base. If your system calculates pension on gross pay including bonuses, override it for the bonus month.
• Recalculate mid-year for mid-year bonuses. If you pay a performance bonus in June rather than December, the same annual recalculation method applies. Add the bonus to the projected annual income, recalculate PAYE, and adjust the remaining monthly deductions for July through December to spread the additional tax evenly.
• Handle gratuity carefully. Under the NTA 2025, gratuity is taxable. When processing a gratuity payment, add it to the employee’s income for the year and compute the additional PAYE. This may require coordination with the employee if the gratuity is paid after they have left — the tax must still be deducted and remitted.
• Reconcile at year-end. Regardless of which method you used during the year, perform a full annual reconciliation in December or January. Compare total PAYE deducted across all 12 months with the correctly computed annual PAYE on actual total income. Adjust for any over- or under-deductions before filing the employer’s annual PAYE return (due 31 January).
• Keep records of the bonus payment and its tax treatment. The employee’s annual return — which they are now required to file separately under the NTAA 2025 — must reconcile with your employer return. Consistent records prevent disputes with the State IRS.

Common Mistakes With Bonus PAYE

• Not including the bonus in PAYE at all. Some employers, particularly informal ones, pay bonuses “off the books” without deducting PAYE. This is an offence under the NTA 2025. The NRS can assess the employer for the under-deduction plus a 40% penalty on the amount not deducted.
• Treating the bonus as a separate flat-rate payment. There is no separate “bonus tax rate” in Nigeria. Bonuses are taxed through the same progressive bands as regular salary. Applying a flat 10% or 15% to a bonus is incorrect and will produce the wrong figure.
• Calculating pension on the bonus. This over-deducts pension and under-deducts PAYE (because the inflated pension reduces chargeable income). The employee ends up with excess pension contributions and an underpayment of income tax.
• Using the combined monthly method without reconciling. If you use Method 2 (adding the bonus to December salary) for simplicity, you must reconcile at year-end and correct any over- or under-deduction. Failing to reconcile means the employee’s annual PAYE does not match their actual liability.
• Forgetting that gratuity is now taxable. HR teams accustomed to processing gratuity as tax-free need to update their procedures. Under the NTA 2025, gratuity is taxable income in the year of receipt. Only compensation for loss of employment or personal injury up to ₦50,000,000 remains exempt.

Final Thoughts

Bonuses and 13th month payments are not tax-free windfalls — they are taxable employment income that must be run through the same PAYE computation as every other naira of salary. The correct approach is to add the bonus to total annual income, recalculate annual PAYE, and deduct the difference. This produces the right result, avoids over-taxation in the bonus month, and eliminates year-end reconciliation problems.

For employees, the key takeaway is to expect a higher PAYE deduction in the month you receive the bonus — but not a dramatically higher one if your employer uses the annual recalculation method. If your December payslip shows PAYE that seems disproportionately large, check whether your employer used Method 2 and over-taxed you. You are entitled to a correction.

For employers and HR teams, the key takeaway is to configure your payroll system correctly: annual recalculation for bonuses, pension only on Basic + Housing + Transport, and a full reconciliation before the employer’s annual PAYE return is filed on 31 January. Use our PAYE Calculator to verify individual computations, or explore the Salary Optimizer to structure compensation packages that maximise take-home pay within the law. For complex payroll situations — multiple bonus tranches, expatriate compensation, or gratuity processing — consult a professional from our Tax Professional Directory.

FAQs About PAYE on 13th Month Salary and Bonuses

Is 13th month salary compulsory in Nigeria?

No. Nigeria has no statutory requirement for 13th month salary. It is a discretionary payment made at the employer’s choice, often as part of the compensation package or company policy. Some employment contracts include it; most do not require it by law.

Is a bonus taxed differently from regular salary?

No. There is no separate “bonus tax rate” in Nigeria. Bonuses are added to total annual employment income and taxed through the same NTA 2025 progressive bands (0% to 25%) as regular salary. The effective tax on the bonus depends on the employee’s marginal rate — which is determined by their total annual income including the bonus.

Is pension deducted from my bonus?

No. Under the Contributory Pension Scheme, pension contributions are calculated on pensionable emoluments (Basic + Housing + Transport) only. Bonuses, 13th month payments, overtime, and other irregular payments are not pensionable and should not attract a pension deduction.

Why is my December PAYE so much higher than normal?

If you received a bonus or 13th month salary in December, the additional PAYE covers the tax on that extra payment. If your employer uses the annual recalculation method, the December deduction includes the catch-up for the full year. If the amount seems disproportionately high, your employer may have used the combined monthly method, which can over-tax you. Ask HR to confirm the calculation method and request a correction if needed.

Is gratuity still tax-free?

No. The NTA 2025 removed the previous tax exemption for gratuity. Gratuity is now taxable in the year it is received, at the applicable progressive rates. The only remaining exemption is for compensation for loss of employment or personal injury up to ₦50,000,000.

How should employers handle mid-year bonuses?

The same way as year-end bonuses: add the bonus to projected annual income, recalculate annual PAYE, determine the additional tax attributable to the bonus, and either deduct it in the bonus month or spread the adjustment across the remaining months. The annual recalculation method works regardless of when in the year the bonus is paid.

What if my employer did not deduct PAYE from my bonus?

You are still liable for the tax on the income. When you file your individual annual return (due 31 March), you must declare the bonus and pay any additional tax owed. However, your employer is also at fault — under the NTAA 2025, the penalty for failure to deduct tax at source is 40% of the amount not deducted, which falls on the employer.