How to Set Up Payroll for a New Nigerian Business

You have hired your first employees, agreed on salaries and chosen a payday. Then the questions start: How much tax should you deduct? What about pensions? Is the salary you agreed on the amount the employee receives?

Setting up payroll early helps you answer these questions before your first salary payment becomes a problem. To set up payroll in Nigeria, organise employee records, define salary structures, register for applicable statutory obligations, configure deductions and establish a monthly approval and payment process. This guide walks you through each step.

What is Payroll?

Payroll is the process of calculating employee earnings, applying deductions, paying salaries and keeping records. It also includes tracking employer contributions and making the required remittances. Three important figures to understand are gross pay, which is the total earnings before deductions; net pay, which is the amount the employee receives after deductions; and total employer cost, which includes gross pay plus employer-funded contributions and benefits. Keeping these figures separate helps you budget accurately and explain salaries clearly.

1. Organise your business and employee records

Keep your business registration documents, tax identification details and business bank account information ready. Identify the tax authority relevant to your employees and complete employer registration requirements before processing PAYE. Create a payroll record for each employee containing:

• Full name and employee ID.

• Job title, employment type and start date.

• Agreed salary and salary breakdown.

• Bank name, account name and account number.

• Residential address and applicable tax identification details.

• Pension Fund Administrator and Retirement Savings Account details, where applicable.

• Approved deductions and supporting documents.

Confirm bank details directly with employees. Restrict access to salary, bank and identity information to authorised staff.

2. Agree on a clear salary structure

State whether the amount in each employment offer is gross or net. A promise of a specific take-home amount requires a different calculation from an agreement on gross salary. Document basic salary, housing and transport allowances, other allowances, commissions and bonuses. Keep expense reimbursements separately identifiable and review their tax treatment.

For example, a monthly gross salary of ₦200,000 might include ₦120,000 basic salary, ₦40,000 housing allowance and ₦40,000 transport allowance.

Also decide how to handle employees joining halfway through a month, approved overtime, unpaid leave and salary changes. Put the rules in writing so payroll decisions stay consistent.

3. Set up PAYE using the current Nigerian tax rules

Pay As You Earn, or PAYE, is the income tax an employer deducts from an employee's taxable earnings and remits to the relevant tax authority.

The Nigeria Tax Act 2025 introduced new personal income tax rules effective from January 2026. Use an updated calculation rather than copying an older spreadsheet. These rates apply progressively to portions of chargeable income. You do not apply the highest applicable rate to the employee's entire salary. Employees earning the national minimum wage or less are exempt from PAYE.

Source: PwC Nigeria, Taxes on Personal Income:

Calculate chargeable income after qualifying deductions and reliefs. Eligible pension contributions and other approved items may reduce taxable income. The former Consolidated Relief Allowance has been removed. Rent relief is the lower of 20% of annual rent actually paid or ₦500,000, subject to the required declaration and information.

Source: PwC Nigeria, Individual Deductions:

Have a tax professional check your initial setup, particularly where employees have benefits in kind, variable earnings or changes in employment during the year.

4. Identify pension and other statutory obligations

PAYE is only one part of Nigerian payroll compliance. Check which contribution and registration requirements apply to your business.

Pension Contributions

Where the Contributory Pension Scheme applies, minimum contributions are generally 8% from the employee and 10% from the employer, calculated on the applicable pensionable emoluments.

Deduct the employee's portion from pay and budget separately for the employer's portion. Confirm your business's coverage, contribution base and remittance arrangements with PenCom or a licensed Pension Fund Administrator.

Employees' Compensation Scheme

NSITF states that the Employees' Compensation Scheme contribution is 1% of total monthly payroll and is employer-funded. Treat it as a business cost rather than an employee deduction.

Other Applicable Obligations

Review National Housing Fund requirements, health insurance obligations, Industrial Training Fund requirements and group life insurance obligations. Their applicability and calculation bases should be assessed for your business. Do not assume every statutory contribution uses the same percentage or salary base.

5. Choose your payroll method

You can use a spreadsheet, payroll software or an outsourced payroll provider. A spreadsheet can support a simple payroll if formulas are reviewed, access is controlled and tax settings remain current. As employees, salary adjustments and deductions increase, repeated manual updates become harder to manage.

When evaluating payroll software in Nigeria, check whether it supports current PAYE rules, configurable deductions, payslips, payroll reports, approval controls and secure access. Also ask what happens after calculation. Generating a schedule, transferring salaries and remitting statutory payments are separate activities; confirm exactly which services are included.

6. Create a payroll calendar and approval process

Choose a payday, then work backwards. For example:

• By the 20th: submit commissions, overtime and other adjustments.

• By the 23rd: check attendance, starters, leavers and salary changes.

• By the 25th: calculate and review payroll.

• By the 27th: approve the payroll and confirm funding.

• On the 28th: pay salaries and issue payslips.

These are example internal dates, not statutory deadlines.

PAYE is due on or before the 10th day of the following month. Employers must also file their annual employee emolument return by 31 January for the preceding year. Confirm current filing procedures and any official deadline notices with your relevant tax authority. Assign one person to prepare payroll and another to review it where possible.

7. Test your first payroll before paying employees

Run a trial calculation and check each employee's gross pay, tax, deductions and net pay. Compare the total against your approved salary budget.

Here is an illustrative calculation using a ₦200,000 monthly gross salary. Assume the full salary is pensionable, employee pension is 8%, employment lasts the full year, and there are no other deductions or reliefs. The employer's pension contribution would be ₦20,000 monthly under these assumptions, paid in addition to gross salary. Other employer obligations would increase the total employment cost.

This example demonstrates the calculation, not a universal take-home amount. Actual payroll depends on each employee's circumstances and qualifying reliefs.

8. Pay salaries, issue payslips and reconcile records

After approval, transfer salaries and confirm successful payments. Investigate failed transfers promptly. Each payslip should show the pay period, gross earnings, individual deductions and net pay. Keep employer contributions separately identifiable so employees can understand what was deducted from their salaries.

Retain payroll reports, approval records, payment evidence, statutory schedules and remittance receipts. Reconcile these records monthly: a calculated deduction is not proof that it has been remitted.

Build a payroll process your business can rely on

Your first payday should not be the first time you check how payroll works. Start with accurate employee records, clear salary agreements and reviewed calculations. Then follow the same approval, payment and reconciliation process every month.

Need help organising payroll as your team grows? Book a demo with BizEdge to explore its payroll tools and discuss your business's setup requirements.