Income tax illustration

If you earn a salary in Nigeria, you’re already paying tax whether you understand it or not.
That tax is called PAYE (Pay As You Earn), and it’s deducted from your salary every month.

The problem?
Most people don’t actually know how that number is calculated.

With the Nigeria Tax Act 2025 (effective from 2026), the rules have changed, and this guide will walk you through exactly how to calculate your own PAYE, step by step, without stress.

By the end of this article, you should be able to look at your salary and say:
“Okay, this makes sense.”


First, what PAYE really means

PAYE stands for Pay-as-you-earn and is simply personal income tax for salary earners.

Most employers already deducts it from your pay and sends it to the tax authority on your behalf.

And here's how to know your tax figures. 


Step 1: Start with your annual salary

PAYE is calculated annually, even though it’s deducted monthly.
So the first thing you do is convert your salary to a yearly figure.

Example:
  • ₦100,000 per month → ₦1,200,000 per year and so on, you get the logic.


Step 2: Know the deductions the law allows

Under the new tax framework, not everything you earn is taxed immediately.

Certain deductions are allowed before tax is applied.

1. Pension contribution (if applicable)

If you’re enrolled in the contributory pension scheme through your employer, the employee portion is deducted before tax.


2. Rent relief

Under the new tax act, rent relief replaces the old CRA system.

If you pay rent as a tenant, you may deduct:
20% of your annual rent, capped at ₦500,000

Whichever is lower applies.

So:
  • If you pay ₦600,000 rent yearly → 20% = ₦120,000 (allowed)
  • If you pay ₦3,000,000 rent yearly → 20% = ₦600,000, but cap applies → ₦500,000

3. Other deductions

Some other deductions may apply in specific situations (like statutory contributions, etc).


Step 3: Get your taxable income

Now subtract your deductions from your annual salary.

Formula:
Annual taxable income = Annual salary − (pension + rent relief + other valid deductions)

If the result is zero or negative, your tax is zero.


Step 4: Apply the new tax bands

Under the new tax act, personal income tax is progressive. That means you don’t tax everything at one rate.

Here’s how it works:
  • First ₦800,000 → 0% (tax-free)
  • Next ₦2,200,000 → 15%
  • Next ₦9,000,000 → 18%
Higher bands apply only if your income goes beyond this.

This first ₦800,000 tax-free threshold is the “baseline” many people talk about and it matters especially for low and mid-income earners.

Let's look at examples.


Example calculations, so you can understand better

Example 1: ₦65,000 monthly salary

Annual salary: ₦780,000
This is below ₦800,000.

Result:
You are tax-exempt under the new tax structure. No PAYE tax.


Example 2: ₦100,000 monthly salary

Annual salary: ₦1,200,000
We'll make this calculation with No pension and no rent relief

Tax calculation:
First ₦800,000 → 0%
Remaining ₦400,000 → 15% = ₦60,000 yearly

Result:
Annual tax: ₦60,000
Monthly PAYE: about ₦5,000


Example 3: ₦1,000,000 monthly salary

Annual salary: ₦12,000,000
Pension: ₦960,000 (8%)
Rent relief: ₦240,000 (example, assuming your rent is 1.2M—20%)

Taxable income: ₦12,000,000 − ₦960,000 − ₦240,000 = ₦10,800,000

Apply bands:
First ₦800,000 → 0%
Next ₦2,200,000 → 15%
Remaining ₦7,800,000 → 18%

This gives you a clear, explainable PAYE figure, not guesswork.


Why this is critical in 2026

Understanding PAYE helps you:
  • Know if your employer’s deductions make sense
  • Estimate your take-home pay correctly
  • Avoid panic when tax figures change
  • Plan better, especially if you’re negotiating salary
Most people don’t have a tax problem. They have a clarity problem.


Final notes

This guide is meant to help you understand, not scare you.
Tax doesn’t have to feel like punishment, and when you can see the numbers clearly, this scare vanishes.

If you want to check your figures quickly without doing the maths manually, you can use our calculator but understanding the process is what gives you peace of mind.