What You Need to Know About the New PAYE Tax Law in Nigeria

The new PAYE tax law in Nigeria, effective from January 1, 2026, introduced major changes to how personal income tax (PIT) and PAYE (Pay As You Earn) are calculated for employees.

This reform signed into law in June 2025 as the Nigeria Tax Act (NTA) 2025, introduces a more progressive Personal Income Tax (PIT) structure, adjusts tax bands and rates, updates allowable deductions, and replaces part of the old consolidated relief allowance with a clearly defined rent relief.

For HR professionals, employers, accountants, and SMEs, understanding these changes is essential because PAYE in 2026 will no longer follow the old calculation pattern. Every monthly payroll run must now align with the updated personal income tax framework, ensuring correct tax deductions and compliance with the new rules.

Key Changes Employers and HR Teams Need to Know

1. New Progressive Tax Bands

The Nigeria Tax Act (NTA) 2025 uses a structured, progressive model that taxes income in layers. The approved bands are:

Annual Income (NGN)	PIT Rate (%)
First ₦800,000	0
Next ₦2,200,000	15
Next ₦9,000,000	18
Next ₦13,000,000	21
Next ₦25,000,000	23
Above ₦50,000,000	25

These bands ensure that employees only pay higher rates as their income moves into higher brackets. This structure is more progressive and gives low- and mid-income earners a lighter tax burden because the first ₦800,000 after deductions is tax-free.

It is also important to note that the old minimum tax rule of 1% of total income no longer applies under the new law. It has been replaced entirely by the expanded 0% tax band on the first ₦800,000. Employers still applying the old minimum tax calculation are automatically non-compliant from January 2026.

2. CRA Removed and Rent Relief Introduced

Under the new PAYE tax law in Nigeria, the Consolidated Relief Allowance (CRA) no longer exists. It has been replaced with a rent relief system, which allows employees to reduce taxable income if they pay rent and can prove it.

How Rent Relief Works

• Rent relief equals 20% of the annual rent paid, but capped at ₦500,000 whichever is lower.
• If an employee’s annual rent is such that 20% of it is more than ₦500,000, the claimable deduction is still just ₦500,000 (the cap). 
• And ONLY available to employees who pay rent and can prove it.

Is Rent Relief Optional or Mandatory?

Rent relief is optional. The employer should apply it only if the employee pays rent and provides proof, such as:

• Rent receipts
• Lease agreement
• Employer-approved rent declaration

Employees who do not pay rent cannot claim rent relief.

3. Statutory Deductions Still Apply

The following deductions remain valid under the new PAYE tax law in Nigeria: 

• Employee pension contribution 
• National Housing Fund (NHF) contribution
• National Health Insurance Scheme (NHIS) contributions
• Life insurance premiums
• Mortgage interest (for owner-occupied homes)
• Approved charitable donations

These deductions help reduce taxable income.

However, there is a critical update on NHF that every private sector employer must note. Under the new law, private sector employees are no longer under compulsory obligation to contribute to the NHF. NHF contributions of 2.5% of monthly income are now voluntary for private sector employees. Only public sector employees remain under mandatory NHF contribution.

This means that private sector employers should not automatically deduct NHF from employee salaries without the employee’s consent. Where an employee voluntarily chooses to contribute, the 2.5% rate still applies and remains deductible for tax purposes. Employers who continue to treat NHF as mandatory for private sector staff are operating outside the current legal framework.

4. Steps to Calculate PAYE Under the New Law

To compute PAYE for any employee:

1. Start with annual gross income and subtract allowable deductions, such as:

• Pension
• NHF (where applicable and voluntary for private sector)
• Rent relief (if eligible)

2. The result = Chargeable Income

3. Apply the new 2026 PIT tax bands to the chargeable income and add the tax from each applicable band to get Annual PAYE

4. Divide by 12 to get Monthly PAYE

Detailed Example: PAYE Calculation Under the 2026 Law

Employee Profile:

• Annual Gross Salary: ₦3,600,000
• Monthly Gross Salary: ₦300,000
• Monthly Basic Salary: ₦100,000
• Employee’s annual rent : ₦600,000
  
• Statutory Pension = 8% of gross salary 
• NHF = 2.5% of basic salary
• Rent Relief: 20% of annual rent (capped at ₦500,000)

STEP 1: Statutory Deductions

1. Pension (8% of ₦3,600,000)

= ₦288,000

2. NHF (2.5% of ₦100,000× 12 months)

= 0.025 × 1,200,000
= ₦30,000 

3. Rent Relief

• Annual rent = ₦600,000
• 20% × 600,000 = ₦120,000
• Allowed Rent Relief = ₦120,000 (because it is lower than ₦500,000)

Total Annual Deductions = Pension + NHF + Rent Relief

 = ₦288,000 + ₦30,000 + ₦120,000 
= ₦438,000

STEP 2: Compute Chargeable Income

Chargeable Income = Gross Income − Total Deductions
= ₦3,600,000 − ₦438,000
= ₦3,162,000

STEP 3: Apply the 2026 Tax Bands

2026 PIT Bands

Band 1: First ₦800,000 @ 0%

Tax = ₦0

Remaining income:
₦3,162,000 − ₦800,000 = ₦2,362,000

Band 2: Next ₦2,200,000 @ 15%

Since remaining chargeable income (₦2,362,000) is more than ₦2,200,000:
Full band used → Tax =
15% × 2,200,000 = ₦330,000

Remaining income:
2,362,000 − 2,200,000 = ₦162,000

Band 3: Remaining ₦162,000 @ 18%

= 18% × 162,000
= ₦29,160

Therefore,

Annual PAYE
= ₦0 + ₦330,000 + ₦29,160 (Band 3)
= ₦359,160

STEP 4: Monthly PAYE

= ₦359,160 ÷ 12
= ₦29,930

5. TIN is Now Mandatory for All Taxable Employees

The Nigeria Tax Administration Act, which forms part of the 2025 tax reform package, now requires all taxable persons to have a valid Tax Identification Number (TIN). Employees without a TIN may face restrictions in processing their tax obligations.

HR teams should verify TIN compliance for every employee on their payroll as part of standard payroll practice. Where an employee does not have a TIN, HR should guide them through the registration process with the Nigeria Revenue Service before the next payroll run.

6. Gratuity is Now Taxable

This is a new change that many HR and payroll teams are not yet aware of. Under the Nigeria Tax Act (NTA) 2025, gratuity is now classified as taxable income. The previous exemption that allowed gratuity to be paid to exiting employees tax-free has been removed.

This directly affects how termination packages are calculated and processed. HR teams must now factor in PAYE implications when computing gratuity payments for exiting employees and ensure the correct tax is deducted before payment is made.

7. Nigerian Tax Residents Are Now Taxed on Worldwide Income

This is one of the most significant but least discussed changes in the new law. Nigerian tax residents are now liable to pay tax on their worldwide income, not just income earned within Nigeria.

This affects employees who receive income from foreign sources, remote work arrangements with international clients, dividends from overseas investments, or any other income earned outside Nigeria. HR teams managing internationally mobile employees or remote workers with foreign income sources need to factor this into their payroll and compliance planning immediately.

Why You Should Understand the New Tax Law

The new PAYE tax law in Nigeria reshapes how employees are taxed, how employers compute payroll, and how HR teams track compliance. Since the 2026 law removes CRA, introduces rent relief, adjusts tax brackets, and updates statutory contributions (including NHF at 2.5% of gross salary), businesses must fully understand these changes to avoid penalties or under-deduction of tax.

Here’s why this matters:

1. Every payroll run from January 2026 must follow the new tax bands, new relief structure, and updated contributions. Using the old calculation method automatically makes your payroll non-compliant.

2. The Nigeria Revenue Service (NRS), formerly FIRS, now has expanded auditing powers under the new law. Incorrect PAYE deductions can attract fines, interest on underpaid tax, and back-dated compliance reviews. The penalties under the new law are stiffer than before, making it more costly than ever to get payroll wrong.

3. Team members will want to know:

• Why their PAYE deduction changed
• How rent relief affects them
• How the new tax bands affect take-home pay

A solid understanding equips HR to give clear and accurate guidance.

4. Accurate PAYE forecasting helps businesses determine total staff cost, monthly statutory remittances, yearly payroll budget, and compliance risks. When tax law changes, planning becomes even more criticalThe Personal Income Tax (Amendment) Act 2025 (effective January 1, 2026) gives states more auditing control. Incorrect PAYE deductions can attract:

5. The zero tax on the first ₦800,000 ensures lower-income earners keep more money. Meanwhile, higher earners pay progressively higher rates. Rent relief also helps employees who pay rent and the ₦500,000 cap ensures fairness and uniformity across the board.