Most explanations of PAYE start with the tax bands. That is the wrong end. By the time you reach the bands, the most important decisions have already been made — because tax is not charged on what you earn, it is charged on what is left after the deductions the law allows.
Here is the whole calculation, in the order it actually happens.
Step one: start from annual gross
Everything in the Nigeria Tax Act 2025 — effective January 2026 works annually, even though you pay people monthly. So the first move is always the same: take the monthly gross and multiply by twelve.
This catches people out. A mid-year raise, a bonus, a thirteenth-month payment — each changes the annual figure, and therefore the tax, in ways that are not obvious from looking at one month in isolation.
Step two: take off the reliefs
Two deductions matter for most employees.
Pension. The employee's contribution is 8% of pay, and it comes off before tax is calculated. The employer adds 10% on top — that part is a cost to the business, not a deduction from the employee.
Rent relief. If the employee pays rent, they can deduct 20% of the annual rent, up to a maximum of ₦500,000 a year. It is the lower of those two that applies, so someone paying very high rent does not get unlimited relief.
What remains after these is taxable income. This is the number the bands are applied to — not the gross.
Step three: apply the bands, in slices
This is the part that is most often misunderstood. The bands are not a single rate you pick based on your salary. Income is cut into slices, and each slice is taxed at its own rate.
The first ₦800,000 of taxable income is taxed at nothing at all. The next slice is taxed at 15%, the slice after that a little higher, and so on up to 25% at the very top.
So a raise never costs you money. Moving into a higher band only affects the portion of income inside that band — everything below it keeps being taxed exactly as before.
The minimum wage exemption
Anyone earning the national minimum wage of ₦70,000 a month or less pays no PAYE. Not a reduced rate — nothing.
Why two people on the same salary owe different tax
Because taxable income is personal:
- One pays rent and claims relief, the other does not
- One is in a pension scheme, the other is not
- One receives part of their pay as a bonus that lands in a different month
This is why a payroll spreadsheet that applies a single rate to everyone gets it wrong. The rate depends on the person, not the salary.
Check it yourself
You can run any salary through our free PAYE calculator and see every step of this working, with the actual figures for each band. No account needed.
These figures are from the Nigeria Tax Act 2025 — effective January 2026, rule set 2026-01.