Step-by-Step PAYE Calculation for the 2026 Tax Year

Learn how to calculate PAYE tax for 2026 under the Nigeria Tax Act 2025. Worked examples, new tax bands, deductions, and a free calculator included.

Getting your PAYE calculation right for 2026 is not optional — it is a legal requirement under the Nigeria Tax Act 2025, and employers who get it wrong face stiffer penalties than before. The new law changed the tax bands, scrapped the Consolidated Relief Allowance, and introduced a rent relief system that requires actual documentation. Whether you are an HR manager running payroll, an accountant advising clients, or an employee checking your payslip, this guide walks you through the entire calculation from gross salary to monthly PAYE deduction, with real Naira figures at every step.

What Is PAYE and How Does It Work in Nigeria?

PAYE stands for Pay-As-You-Earn. It is the system through which employers deduct personal income tax from employees’ salaries each month and remit it to the relevant tax authority — either the State Internal Revenue Service (SIRS) for most employees or the Nigeria Revenue Service (NRS) for certain categories of workers. The employer acts as a collection agent. The employee does not file separately for PAYE; it is handled at source.

Under the NTA 2025, PAYE applies to all forms of employment income. This includes your basic salary, housing allowance, transport allowance, leave allowance, overtime, bonuses, and the taxable value of any benefits in kind your employer provides. The calculation follows a specific sequence: determine gross income, subtract allowable deductions and reliefs to arrive at chargeable income, then apply the progressive tax bands.

The NTA 2025 Tax Bands for Individuals

The foundation of every PAYE calculation is the tax table. The NTA 2025 introduced six progressive bands, replacing the old PITA structure that ranged from 7% to 24%. Here are the current bands as published in the official gazette:

The most significant feature is the 0% band. The first ₦800,000 of chargeable income attracts no tax at all. Under the old PITA system, every naira was taxed from the first band at 7%. This single change benefits every taxpayer but has the largest relative impact on lower earners.

Allowable Deductions and Reliefs Under NTA 2025

Before you apply the tax bands, you must subtract all allowable deductions from gross income. The result is your chargeable income — the figure the tax bands actually apply to. Here is what qualifies under the NTA 2025:

1. Employee Pension Contribution

Under the Contributory Pension Scheme, the employee contributes a minimum of 8% of pensionable emoluments. Pensionable emoluments are defined as Basic Salary + Housing Allowance + Transport Allowance. Only these three components count — other allowances like leave, utility, or meal allowances are excluded from the pension base.

This 8% contribution is fully deductible from your gross income before PAYE is computed. The employer’s 10% contribution is not part of the employee’s taxable income.

2. Rent Relief

The NTA 2025 abolished the Consolidated Relief Allowance (CRA) and replaced it with a targeted rent relief. The formula is straightforward:

Rent Relief = 20% of annual rent actually paid, subject to a maximum of ₦500,000 per year (whichever is lower).

You must provide documentation — a tenancy agreement, rent receipts, or bank transfer evidence showing payment to a landlord. If your employer provides free accommodation, you cannot claim rent relief. If you live in your own property with no rent expense, you also cannot claim it.

3. National Housing Fund (NHF)

Employees contributing to the NHF pay 2.5% of their basic salary. This contribution is deductible from gross income for PAYE purposes.

4. National Health Insurance Scheme (NHIS)

NHIS contributions are deductible under the NTA 2025. The standard employee rate is 5% of basic salary for employers with 10 or more employees. The contribution must be to an approved NHIS plan.

5. Life Insurance Premiums

Premiums paid on a qualifying life insurance policy are deductible, provided the policy is with a registered Nigerian insurer and meets the requirements set out in the Act.

6. Approved Donations

Donations to approved charitable organisations, educational institutions, or statutory funds may be deductible, subject to the conditions and limits specified in the NTA 2025.

The Seven-Step PAYE Calculation Process

Here is the complete process, laid out in the order you should follow for every employee:

Step 1: Calculate Gross Annual Income

Add up every component of the employee’s annual remuneration package:

Gross Annual Income = Basic Salary + Housing Allowance + Transport Allowance + Utilities + Leave Allowance + Overtime + Bonuses + Taxable Value of Benefits in Kind

Under the NTA 2025, benefits in kind have defined valuation rules. An employer-provided vehicle is valued at 5% of its cost per year. Rent-free accommodation is valued at 20% of gross income. These values must be added to gross income.

Step 2: Identify Pensionable Emoluments

Separate out the three pensionable components:

Pensionable Emoluments = Basic Salary + Housing Allowance + Transport Allowance

Only these three count for pension purposes, regardless of what other allowances the employee receives.

Step 3: Calculate Employee Pension Contribution

Employee Pension = 8% × Pensionable Emoluments

This amount is deducted from gross income before tax is calculated.

Step 4: Calculate Rent Relief

If the employee pays rent and has documentation:

Rent Relief = Lower of (20% × Annual Rent Paid) or ₦500,000

If the employee does not pay rent, this figure is zero.

Step 5: Calculate Other Deductions

Add up NHF (2.5% of basic), NHIS (if applicable), life insurance premiums, and any other qualifying deductions.

Step 6: Determine Chargeable Income

Chargeable Income = Gross Annual Income − Pension Contribution − Rent Relief − NHF − NHIS − Other Deductions

This is the figure you apply the tax bands to.

Step 7: Apply the Progressive Tax Bands

Slice the chargeable income through each band in order. Tax each slice at its applicable rate. Add the results to get total annual PAYE. Divide by 12 for the monthly deduction.

Full Worked Example: ₦4,800,000 Annual Gross

Let us work through a complete example for an employee earning ₦400,000 per month (₦4,800,000 annually). This salary level is common among experienced professionals in Lagos, Abuja, and Port Harcourt.

Salary breakdown:

• Basic Salary (60%): ₦2,880,000
• Housing Allowance (20%): ₦960,000
• Transport Allowance (10%): ₦480,000
• Utilities Allowance (5%): ₦240,000
• Leave Allowance (5%): ₦240,000
• Annual rent paid: ₦1,800,000

Step 1 — Gross Annual Income: ₦4,800,000

Step 2 — Pensionable Emoluments: ₦2,880,000 + ₦960,000 + ₦480,000 = ₦4,320,000

Step 3 — Employee Pension (8%): ₦4,320,000 × 0.08 = ₦345,600

Step 4 — Rent Relief: 20% of ₦1,800,000 = ₦360,000. This is below the ₦500,000 cap, so rent relief = ₦360,000.

Step 5 — NHF (2.5% of basic): ₦2,880,000 × 0.025 = ₦72,000

Step 6 — Chargeable Income: ₦4,800,000 − ₦345,600 − ₦360,000 − ₦72,000 = ₦4,022,400

Step 7 — Apply the tax bands:

Total Annual PAYE: ₦330,000 + ₦184,032 = ₦514,032

Monthly PAYE Deduction: ₦514,032 ÷ 12 = ₦42,836

After PAYE, pension, NHF, and other deductions, this employee’s approximate monthly take-home pay is around ₦322,531. You can verify this figure instantly with our PAYE Calculator.

Comparison: Same Salary Under the Old PITA System

To appreciate what the NTA 2025 changed, here is the same ₦4,800,000 salary under the old PITA rules:

Under PITA:

• Gross income: ₦4,800,000
• CRA (20% of gross + ₦200,000): ₦1,160,000
• Pension (8% of gross under old calculation): ₦384,000
• Taxable income: ₦4,800,000 − ₦1,160,000 − ₦384,000 = ₦3,256,000
• Old PITA bands: ₦300,000 × 7% + ₦300,000 × 11% + ₦500,000 × 15% + ₦500,000 × 19% + ₦1,600,000 × 21% + ₦56,000 × 24%
• Tax: ₦21,000 + ₦33,000 + ₦75,000 + ₦95,000 + ₦336,000 + ₦13,440 = ₦573,440

Under NTA 2025: ₦514,032

Annual difference: ₦59,408 less tax under the new system — that is roughly ₦4,951 more in your pocket every month. The 0% band on the first ₦800,000 does most of the heavy lifting here, even though the CRA deduction under PITA was larger than the new rent relief.

Second Worked Example: ₦18,000,000 Annual Gross

For a higher earner — say a senior manager on ₦1,500,000 per month. Salary split: Basic 50% (₦9,000,000), Housing 25% (₦4,500,000), Transport 15% (₦2,700,000), others 10% (₦1,800,000). Annual rent paid: ₦3,500,000.

Deductions:

• Pensionable emoluments: ₦9,000,000 + ₦4,500,000 + ₦2,700,000 = ₦16,200,000
• Employee pension (8%): ₦1,296,000
• Rent relief: 20% of ₦3,500,000 = ₦700,000 → capped at ₦500,000
• NHF (2.5% of basic): ₦225,000

Chargeable income: ₦18,000,000 − ₦1,296,000 − ₦500,000 − ₦225,000 = ₦15,979,000

Tax calculation:

Total Annual PAYE: ₦2,785,590

Monthly PAYE: ₦232,133

The effective tax rate here is about 15.5% of gross income. Under the old PITA system with its CRA and 24% top rate, this employee would have paid roughly ₦2,950,000 annually — so the NTA 2025 still delivers a modest saving even at this income level.

Tips for Getting Your PAYE Right

• Always work with annual figures first. Calculate everything on an annual basis, then divide by 12 for the monthly PAYE deduction. Working month-by-month from the start leads to rounding errors that compound over the year.
• Keep the salary structure flexible. The split between basic, housing, and transport directly affects your pensionable emoluments and therefore your pension deduction. A different split can change your chargeable income and your final PAYE. Model different scenarios using our Salary Optimizer.
• Document everything. Rent receipts, tenancy agreements, pension statements, NHIS enrolment records, and life insurance certificates should all be on file. The NRS can request evidence for any relief claimed.
• Watch for mid-year changes. If an employee gets a raise, bonus, or new benefit in kind during the year, you must recalculate PAYE for the remaining months. Do not wait until December to true up.
• Check for minimum tax. If an employee’s chargeable income produces zero tax (or less than 1% of total income), a minimum tax of 1% of total income may apply under the NTA 2025. However, employees earning at or below the national minimum wage are fully exempt from both PAYE and minimum tax.

Common Mistakes in PAYE Calculations

• Using gross salary as chargeable income. The tax bands apply to chargeable income — after deductions — not to your raw gross pay. This single error overstates the tax bill dramatically.
• Calculating pension on gross salary instead of pensionable emoluments. Pension is 8% of Basic + Housing + Transport only. Including utilities, leave, or bonuses in the pension base inflates the deduction incorrectly.
• Applying the old PITA bands. The 7%/11%/15%/19%/21%/24% structure no longer applies from January 2026. Any payroll system still using these rates is producing wrong figures.
• Claiming rent relief without proof. If an employee cannot produce rent documentation, the relief must be excluded from the PAYE computation. Applying it anyway creates a compliance risk for the employer.
• Forgetting benefits in kind. A company car (5% of cost), rent-free housing (20% of gross income), and other employer-provided benefits are taxable. They must be added to gross income before the calculation begins.
• Ignoring the ₦500,000 rent relief cap. Even if an employee pays ₦5,000,000 in annual rent, the maximum relief is ₦500,000. Applying 20% of the full rent amount without applying the cap is an error.

How to Verify Your PAYE Figures

Manual calculations are useful for understanding the mechanics, but they are prone to arithmetic errors — especially when dealing with multiple employees at different salary levels. Here are three ways to check your work:

1. Use the TaxNGR PAYE Calculator. Enter your gross salary, select your deductions, and get an instant result based on the NTA 2025 bands. It is free and updated for the 2026 tax year. Try it here.
2. Cross-reference with our AI Tax Assistant. If you have a specific question about how a particular allowance or benefit should be treated, the AI Tax Assistant can walk you through it.
3. Consult a tax professional. For complex situations — international assignments, multiple income streams, or large benefits-in-kind packages — a qualified tax adviser can ensure full compliance. Browse our Tax Professional Directory to find one near you.

Final Thoughts

PAYE calculation under the NTA 2025 follows a clear, logical sequence: gross income, minus deductions, equals chargeable income, then apply the progressive bands. The mechanics are not complicated. What trips people up is using outdated rates, miscalculating the pension base, or claiming rent relief without proper documentation.

For most salary earners in Nigeria, the new system is slightly more favourable than the old one. The ₦800,000 tax-free band delivers real savings, particularly for employees earning up to ₦25,000,000 annually. The key is to make sure your employer’s payroll reflects the correct bands and that you have your documentation in order to claim every relief you are entitled to.

Run your own figures through our free PAYE Calculator, or explore the Salary Optimizer to find the salary structure that minimises your tax bill within the law. If you want to test your understanding of the new rules, take our Tax Quiz for a quick self-assessment.

FAQs About PAYE Calculation for the 2026 Tax Year

What tax rates apply to PAYE in 2026?

The NTA 2025 introduced six progressive bands: 0% on the first ₦800,000 of chargeable income, 15% on ₦800,001 to ₦3,000,000, 18% on ₦3,000,001 to ₦12,000,000, 21% on ₦12,000,001 to ₦25,000,000, 23% on ₦25,000,001 to ₦50,000,000, and 25% on everything above ₦50,000,000.

What is the difference between gross income and chargeable income?

Gross income is your total annual remuneration including all allowances and taxable benefits. Chargeable income is what remains after subtracting allowable deductions such as pension, rent relief, NHF, and NHIS. The tax bands apply to chargeable income, not gross income.

How is pension calculated for PAYE purposes?

The employee pension contribution is 8% of pensionable emoluments, which are defined as Basic Salary + Housing Allowance + Transport Allowance. Other components like utilities, leave, or bonuses are not included in the pension base.

Can I claim rent relief if my employer provides housing?

No. Rent relief under the NTA 2025 is available only to employees who pay rent for their own residential accommodation and can provide documentation to prove it. If your employer provides free housing, you receive no rent relief — and the accommodation itself is valued at 20% of your gross income and added to your taxable earnings.

What happens if my PAYE works out to zero?

If your chargeable income falls within the 0% band (₦800,000 or below), your PAYE is zero. However, a minimum tax of 1% of total income may apply in some cases. Employees earning at or below the national minimum wage are fully exempt from both PAYE and minimum tax under the NTA 2025.

Is PAYE the only deduction from my salary?

No. Your net pay also reflects deductions for pension (8%), NHF (2.5% of basic), NHIS (where applicable), and any other items such as union dues or loan repayments. PAYE is just the income tax portion. Use the PAYE Calculator to see a full breakdown of all deductions.

When must employers remit PAYE to the tax authority?

Employers must remit PAYE deductions to the relevant State Internal Revenue Service or the Nigeria Revenue Service within 10 days of the month following the deduction. Late remittance attracts penalties under the NTA 2025, which are stiffer than those under the old PITA regime.