How is Salary Tax calculated in Nigeria?

In Nigeria, salary tax is mainly calculated through the PAYE system (“Pay-As-You-Earn”).
PAYE is not usually a single fixed percentage for everyone.
Nigeria uses a:
Progressive tax system
That means:
The more you earn, the higher the portion of income taxed at higher rates.
So somebody earning:
₦200,000 monthly will not pay the same PAYE rate as somebody earning:
₦1,000,000 monthly.
Simple Overview of How PAYE Is Calculated
Employers generally follow this sequence:
Determine gross salary
Deduct approved reliefs/deductions
Calculate taxable income
Apply PAYE tax bands
Deduct tax monthly
Step 1 — Gross Salary
This is your total salary before deductions.
Example:
Employee
Monthly Salary
A
₦200,000
B
₦500,000
C
₦1,000,000
Step 2 — Remove Approved Deductions
Some deductions legally reduce taxable income.
Common ones:
Pension
NHF
Approved life insurance
CRA (Consolidated Relief Allowance)
What Is Taxable Income?
Taxable income means:
The remaining income after approved deductions and reliefs have been removed.
Government does not usually tax the full salary directly.
Example Using ₦500,000 Salary
Suppose:
Monthly salary:
500,000
Pension Deduction
Minimum employee pension is usually 8%.
So:
500,000×8%=40,000
Remaining income:
500,000-40,000=460,000
NHF Deduction
Assume:
10,000
Remaining:
460,000-10,000=450,000
Life Insurance
Assume:
5,0000
Remaining:
450,000-5,000=445,000
Step 3 — Apply Consolidated Relief Allowance (CRA)
Nigeria gives employees a tax relief called CRA.
Formula:
Max(200,000, 1% Gross Income) +20% Gross Income
This reduces taxable income further before tax rates apply.
Step 4 — Apply PAYE Tax Bands
Nigeria taxes income progressively.
Current annual tax bands are approximately:
Annual Taxable Income
Tax Rate
First ₦300,000
7%
Next ₦300,000
11%
Next ₦500,000
15%
Next ₦500,000
19%
Next ₦1.6 million
21%
Above that
24%
This is annualized, then converted into monthly deductions.
Very Important Point
The rates apply in layers.
It is NOT:
“Everything is taxed at one rate.”
Instead:
Different portions are taxed differently.
Simple Analogy
Imagine filling buckets.
The first bucket:
taxed at 7%
Next bucket:
taxed at 11%
Next:
15%
And so on.
Higher earners fill more buckets.
Example Comparison
Employee A — ₦200,000 Monthly
After deductions and reliefs:
taxable income may become relatively low.
PAYE:
modest.
Employee B — ₦500,000 Monthly
After deductions:
larger taxable income.
PAYE:
higher.
Employee C — ₦1,000,000 Monthly
Even after deductions:
taxable income remains high.
PAYE:
much higher because higher tax bands apply.
Common Deductions That Reduce PAYE
Pension
Usually:
8% employee contribution
Managed by PFAs such as:
Stanbic IBTC Pension Managers
ARM Pension Managers
NHF
National Housing Fund contributions.
Handled through:
fmbn.gov.ng⁠�
Approved Life Insurance
Some approved policies reduce taxable income.
CRA
A major automatic tax relief.
What Usually Does NOT Reduce PAYE
Many people misunderstand this.
Examples that usually do NOT directly reduce tax:
Personal rent
Loan repayments
Cooperative savings
Food expenses
Airtime
Transport spending
Is PAYE the Same for Everyone?
No.
PAYE depends on:
Salary size
Pension contribution
Reliefs
NHF participation
Insurance structure
Payroll method
So two employees earning similar salaries may still pay different PAYE.
How Employers Calculate Monthly PAYE
Most companies use payroll systems.
The system automatically:
Calculates annual income
Removes approved deductions
Applies CRA
Determines annual tax
Divides into monthly PAYE
That monthly amount appears on your payslip.
How to Know If Employer Is Deducting Correctly
Check whether:
Pension is deducted first
CRA is applied
NHF is recognized
PAYE aligns with income level
If PAYE appears unusually high:
request a PAYE computation sheet from HR/payroll.
Simple Practical Illustration
Item
Employee A
Employee B
Salary
₦500k
₦500k
Pension
Lower
Higher
NHF
No
Yes
Insurance
No
Yes
Taxable Income
Higher
Lower
PAYE
Higher
Lower
So legal deductions affect tax directly.
Important Concept to Remember
Gross Salary
Your full earnings before deductions.
Taxable Income
Income remaining after approved deductions/reliefs.
PAYE
Tax calculated on taxable income.
Net Salary
What finally enters your bank account.
Why Many Nigerians Get Confused
Most employees only see:
gross pay
deductions
net salary
But they never see:
taxable income computation
relief calculations
tax band application
So PAYE looks mysterious even though the process follows tax rules.
For official guidance:
firs.gov.ng
pencom.gov.ng
fmbn.gov.ng