How to Calculate Your PAYE Tax (Without Headaches)

When your monthly salary alert drops, do you ever pause and wonder how much tax was deducted or why that specific amount was taken?

For many employees in Nigeria, tax deductions are an unavoidable part of working life yet the exact breakdown is often unclear. They are aware that money has been taken out, but not always how it’s calculated or whether it’s even accurate.

This doesn’t have to always be the status quo. In Nigeria, personal income tax for employees is deducted using the Pay-As-You-Earn (PAYE) system. Employers are legally required to calculate and deduct the right amount of tax before paying salaries and understanding how this process works is valuable for both employees and HR professionals.

In this article, we’ll break down how tax calculation works in Nigeria, especially the PAYE system, and guide you through a step-by-step process and a tax calculation example using figures. This is solely for the purpose of helping you plan better, track your deductions, and ensure compliance as an HR professional processing payroll or a salaried employee reviewing your payslip. 

What Is PAYE (Pay-As-You-Earn)?

PAYE is the system Nigeria uses to collect Personal Income Tax (PIT) from employees. Instead of employees paying tax themselves once a year, employers withhold a portion of their salaries monthly and remit it directly to the government on their behalf to make it easier and less burdensome.

Factors That Affect Your Tax Calculation

Before moving into the actual computation, it’s important to know the main factors that impact how much tax you pay:

• Gross Income: Your basic salary plus any allowances (like housing, transport, meal, etc.).
  
• Statutory Deductions: Pension (8% minimum), National Housing Fund (NHF, 2.5% of basic salary), and any other allowable deductions.
  
• Consolidated Relief Allowance (CRA): A fixed allowance that reduces your taxable income.
  
• Taxable Income: The portion of your salary that is subject to tax after deductions.
  

How Tax Is Calculated: Step-by-Step Guide

Here’s a simple flow:

The gross income for an individual is #330,000. For the purpose of this calculation, it is assumed that pension is calculated at 8% of gross income with NHF deduction. Refer to Pwc Tax guide for more details.

1. Determine Gross Income

Gross income also known as monthly emoluments includes:

• Basic Salary
• Housing Allowance
• Transport Allowance
• Other cash benefits

Example:

Basic Salary: ₦200,000
Housing: ₦80,000
Transport: ₦50,000
Gross Income = ₦330,000 (Basic salary + other allowance)

2. Deduct Allowable Contributions

Allowable deductions reduce your taxable income.

Common deductions:

• Pension Contribution (8% of gross income)
• NHF Contribution (2.5% of basic salary)

Example:

• Pension (8% of ₦330,000) = ₦26,400
• NHF (2.5% of ₦200,000) = ₦5,000

Total deductions = ₦31,400

3. Apply Consolidated Relief Allowance (CRA)

Consolidated Relief Allowance (CRA) is a portion of the income of an employee that will not be assessed to tax, or the amount that is tax exempted. The CRA in Nigeria is N200,000.00 or 1% of the gross income, whichever is higher plus 20% of the gross income

CRA = 20% of Gross Income + Higher of ₦200,000 or 1% of Gross Income

Example:

• 20% of ₦330,000 = ₦66,000
• 1% of ₦330,000 = ₦3,300 (in this case ₦200,000 is higher)

So,

• CRA = ₦66,000 + ₦200,000 = ₦266,000

4. Calculate Taxable Income

Now subtract your total deductions and CRA from Gross Income.

Taxable Income = Gross Income−(Deductions+CRA)

Example:

• ₦330,000 – (₦31,400 + ₦266,000) = ₦32,600

5. Apply the PAYE Tax Rates

Nigeria’s PAYE rates are graduated, meaning different portions of your taxable income are taxed at different rates depending on your salary:

Annual Income (NGN)	PIT Rate (%)	Tax payable (NGN)
First ₦300,000	7	2,282
Next ₦300,000	11
Next ₦500,000	15
Next ₦500,000	19
Next ₦1,600,000	21
Above ₦3,200,000	24

Since ₦32,600(taxable income) is low, it falls into the first tax band (7%).

Therefore,

• 7% of ₦32,600 = ₦2,282

This ₦2,282 will be the monthly PAYE tax to be deducted from this individual’s salary.

N.B: PAYE tax applies only when the total of Consolidated Relief Allowance (CRA), pension, and other approved deductions is less than the gross income.

Why Tax Calculation Is Important

• For employees, it helps you understand what is left from your salary.
  
• For human resource managers or payroll teams, it helps ensure accuracy and compliance with remittance deadlines (10th of every month).
  
• For employers, it prevents regulatory penalties for under-deduction or late payments.