What You Need to Know About Nigeria Payroll Tax

Nigeria's 2026 tax reforms introduced a game-changer for payroll: employees earning N800,000 or less per year are now completely exempt from personal income tax. For everyone else, PAYE rates top out at 25%, and employers must contribute 10% of gross salary to pension while employees contribute 8%. This post walks you through the updated rates, deadlines, and forms you need to get payroll right.

1. What is Payroll Tax?

Payroll tax in Nigeria covers the taxes and contributions employers must deduct from employees' wages. The main components are:

PAYE (Pay As You Earn): Personal income tax deducted at source from employee salaries using progressive rates from 0% to 25%
Pension contributions: A total of 18% of gross salary, split between the employer (10%) and employee (8%), remitted to the employee's Pension Fund Administrator (PFA)
NHF (National Housing Fund): 2.5% of gross salary, contributed by the employee
Development Levy: 4% of assessable profits, payable by the employer

2. Who does it apply to?

This usually applies to:

All employers in Nigeria (private and public sector)
Employees earning above the minimum wage threshold
Companies with three or more employees (for pension purposes)
Self-employed individuals (for personal income tax)

3. Why does it matter?

Understanding payroll tax helps you:

Stay compliant with tax laws
Avoid penalties and late fees
Keep proper records
File and pay correctly
Plan your cash flow better

4. How does it work?

Here's the basic process:

Register as an employer with the relevant State Internal Revenue Service (SIRS) and the NRS
Register employees with a Pension Fund Administrator
Calculate PAYE based on the new progressive tax rates
Deduct pension (8%), NHF (2.5%), and PAYE from employee salaries
Add employer pension contribution (10%)
Remit PAYE to the State IRS by the 10th of the following month
Remit pension contributions to the PFA by the due date
File annual employee returns (Form H1) with the tax authority

5. What forms are involved?

Form H1 - Annual return of employees' emoluments and tax deducted
Form H2 - Notification of new employee engagement
Form H3 - Notification of employee disengagement
Monthly PAYE schedule - List of employees and PAYE deducted for the month

6. What information do you need?

Before handling payroll tax, make sure you have:

Employee tax identification numbers (TIN)
Details of each employee's gross salary and allowances
Pension Fund Administrator details for each employee
Records of allowable deductions (pension, NHF, life insurance)
State of residence for each employee (PAYE is a state tax)
Proof of previous PAYE payments

7. Important deadlines

Filing frequency: Monthly PAYE remittance by the 10th of the following month
Payment deadline: Pension contributions within 7 working days after salary payment
Year-end requirements: Annual Form H1 return due by 31 January of the following year

8. Common mistakes to avoid

Not applying the new tax-free threshold (employees earning N800,000 or less annually are exempt from PAYE)
Remitting PAYE to the wrong state (it should go to the employee's state of residence)
Late remittance of pension contributions, which attracts a 2% penalty per month
Failing to file Form H1 by 31 January
Not registering employees for pension when you have three or more staff
Using old tax tables instead of the 2026 reformed rates

9. Simple example

An employee earns N3,000,000 per year (N250,000 per month).

Pension (employee): N250,000 x 8% = N20,000 per month
NHF: N250,000 x 2.5% = N6,250 per month
Taxable income after deductions: N250,000 - N20,000 - N6,250 = N223,750 per month
PAYE: Under the new progressive rates, the monthly PAYE on this amount is approximately N30,000
Pension (employer): N250,000 x 10% = N25,000 per month

Total deducted from employee: N20,000 + N6,250 + N30,000 = N56,250 Additional employer cost: N25,000 (pension)

10. FAQ

Q: What is the new tax-free threshold? A: Under the 2026 tax reforms, employees earning N800,000 or less per year (about N66,667 per month) are completely exempt from personal income tax.

Q: What is the maximum PAYE rate? A: The maximum rate is 25%, which applies to the highest income earners. This is lower than the previous top rate of 24% after accounting for consolidated relief.

Q: Is pension contribution mandatory? A: Yes, for employers with three or more employees. The total contribution is 18% (employer 10%, employee 8%).

Q: Which state do I remit PAYE to? A: PAYE is remitted to the State Internal Revenue Service where the employee resides. For employees in the Federal Capital Territory, it goes to the FCT-IRS.

Q: What changed with the 2026 tax reform? A: Key changes include the new tax-free threshold of N800,000, removal of the Consolidated Relief Allowance, introduction of rent relief (20% of gross income, capped at N500,000), and a maximum tax rate of 25%.

11. Final takeaway

Nigeria's 2026 payroll tax reforms provide significant relief for low-income earners while requiring employers to stay updated on the new rates and thresholds.

Caption

What you need to know about Nigeria payroll tax: Deduct PAYE using the new 2026 rates, contribute 18% to pension (10% employer, 8% employee), and remit PAYE by the 10th of each month.

Sign-up CTA

Want to simplify your tax compliance? Sign up for HeadOffice FREE and manage your business taxes with confidence.