For many Nigerian workers, employee tax or Pay as you earn (PAYE) is something that simply “comes out” of salary every month. The deduction is familiar, but the process behind it often isn’t. This is why PAYE can feel arbitrary - especially when people earning similar amounts see different figures on their payslips.
Rather than starting with tax rates, it helps to walk through one realistic example from start to finish. Seeing how PAYE is built step by step makes it easier to understand what the system is actually doing, and why the final figure is rarely a flat percentage of salary.
Over a year, this adds up to ₦2.4 million in gross income.
This annual figure matters because PAYE is calculated on yearly income, even though deductions are spread across monthly payslips.
From the ₦2.4 million gross income:
The Consolidated Relief Allowance (CRA) was the primary relief in Nigeria’s personal income tax system for many years. Its purpose was simple: to ensure that tax was not charged on a person’s full salary.
CRA was:
Under the CRA system, the relief was calculated as the higher of ₦200,000 or 1% of gross income, plus 20% of gross income.
For this salary:
After removing pension and CRA:
Under the PAYE bands still widely used for 2025, the taxable income is split and taxed in layers:
Approximate monthly PAYE: ₦17,500 (rounded)
No single percentage is applied to the full ₦1.528 million. Each portion is taxed at its own rate, then added together.
Seen this way, PAYE is not a flat charge on salary. It is a layered system that deliberately removes certain portions of income before tax is applied. This is why pension contributions affect PAYE, and why two workers on the same ₦200,000 salary may still see different deductions.
This example also explains why 2026 calculators can look “different”: the structure of reliefs and bands is changing, even if the idea of progressive taxation remains.
Understanding the structure doesn’t remove the burden of tax, but it does replace confusion with clarity — and makes payslips easier to read, compare, and question with confidence.
Rather than starting with tax rates, it helps to walk through one realistic example from start to finish. Seeing how PAYE is built step by step makes it easier to understand what the system is actually doing, and why the final figure is rarely a flat percentage of salary.
A simple salary example
Consider a worker earning ₦200,000 per month.Over a year, this adds up to ₦2.4 million in gross income.
This annual figure matters because PAYE is calculated on yearly income, even though deductions are spread across monthly payslips.
Step 1: Removing pension and reliefs
From the ₦2.4 million gross income:
- Employee pension contribution (8%)
₦192,000 per year
The Consolidated Relief Allowance (CRA) was the primary relief in Nigeria’s personal income tax system for many years. Its purpose was simple: to ensure that tax was not charged on a person’s full salary.
CRA was:
- set by law, not by employers
- applied automatically, not by request
- designed to reduce taxable income before PAYE rates were applied
Under the CRA system, the relief was calculated as the higher of ₦200,000 or 1% of gross income, plus 20% of gross income.
For this salary:
- 1% of ₦2.4 million = ₦24,000 (so ₦200,000 applies)
- 20% of ₦2.4 million = ₦480,000
After removing pension and CRA:
- Taxable (chargeable) income:
₦2,400,000 − ₦192,000 − ₦680,000 = ₦1,528,000
Step 2: Applying the tax bands
Under the PAYE bands still widely used for 2025, the taxable income is split and taxed in layers:
- First ₦300,000 at 7% → ₦21,000
- Next ₦300,000 at 11% → ₦33,000
- Next ₦500,000 at 15% → ₦75,000
- Remaining ₦428,000 at 19% → ₦81,320
Approximate monthly PAYE: ₦17,500 (rounded)
No single percentage is applied to the full ₦1.528 million. Each portion is taxed at its own rate, then added together.
Why this explanation matters
Seen this way, PAYE is not a flat charge on salary. It is a layered system that deliberately removes certain portions of income before tax is applied. This is why pension contributions affect PAYE, and why two workers on the same ₦200,000 salary may still see different deductions.
This example also explains why 2026 calculators can look “different”: the structure of reliefs and bands is changing, even if the idea of progressive taxation remains.
Understanding the structure doesn’t remove the burden of tax, but it does replace confusion with clarity — and makes payslips easier to read, compare, and question with confidence.
- Previous article in the series 'Making Sense of Tax in Nigeria': What Counts as Taxable Income in Nigeria - and What Doesn’t
