Understanding PAYE- A Complete Guide for Employers & Employees

Understanding PAYE TAX: A Complete Guide for Employers & Employees

Understanding PAYE (Pay As You Earn) tax system in Nigeria is essential to staying compliant and avoiding penalties as an employer or employee. PAYE is a form of personal income tax (PIT) that is deducted from the source by the employers from the salaries of their staff and remitted to the state inland revenue service (SIRS) of the employees’ principal places of residence. In this guide, we dissect everything you need to know about Pay As You Earn tax in Nigeria.

WHAT IS PAYE?

This is a system of tax in Nigeria where income tax is deducted from employees’ salaries or wages by the employers before they are paid. It is governed by the Personal Income Tax Act (PITA). In this scheme, employers are considered the agents of the government for tax collection purposes. The law requires employers to deduct tax from employees’ monthly income and remit same to the relevant tax authorities, usually the SIRS.

WHO PAYS PAYE TAX?

Any employee in private or public sector, who earns income from employment through salaries, wages, bonuses, allowances, etc. are liable to PAYE.

RELIEFS/ DEDUCTIONS

An employee is entitled to deduct the following from the gross income before arriving at the taxable income:

Consolidated Relief Allowance (CRA): higher of ₦200,000 or 1% of gross income, plus 20% of gross income.
Pension Contribution: 8% of Basic, Rent, & Transport (BRT).
National Housing Fund (NHF), Life Assurance, National Health Insurance Scheme (NHIS), Gratuities, etc.

GRADUATED TAX RATES

The rates below shall be applied on the taxable income to arrive at the PAYE tax payable:

WHO’S RESPONSIBLE TO REMIT PAYE?

The employer is required by law to deduct and remit PAYE on behalf of the employee, to the State Inland Revenue Service (SIRS) where the employee resides.

EMPLOYER’S OBLIGATIONS

An employer in Nigeria is required by law to:

Register for PAYE with the SIRS where the employee resides
Deduct PAYE monthly from employee’s earnings
Remit the tax deducted to the relevant tax authorities
File monthly PAYE returns (Form H1)
File annual PAYE returns (Form A)
Keep PAYE records and tax details of employees.

Failure to comply with the applicable laws can attract penalties, interest, and reputational damage.

DEADLINE FOR FILING OF PAYE

Monthly Returns: on or before 10th day of the month following deductions (for example, March 2025 deduction is due for filing on the 10th of April 2025)
Annual Returns: not later than 31st January of the following year.

OFFENCES & PENALTIES

PITA Cap P8 LFN 2004 as amended, provides for the offences and the underlying penalties as follows:

COMMON PAYE COMPLIANCE MISTAKES

These include:

Late remittance of PAYE
Incorrect application of reliefs and deductions
Failure to register with SIRS in multiple states
Incomplete or inaccurate returns

CASE STUDY (Worked Example)

Let us assume you are provided with the following information relating to an employee of Eskoba Limited:

Name: Audu Chike Adeola
Monthly Salary N600,000
Basic, Rent, & Transport Allowance N500,000
Annual Gross Income: N7,200,000
Consolidated Relief Allowance N1,640,000 (i.e. N200,000 plus 20% of N7,200,000)
Pension N480,000 (i.e. 8% x N500,000 x 12Months)
Total Reliefs N2,120,000 (i.e. N1,640,000 + N480,000)
Taxable Income N5,080,000 (i.e. N7,200,000 – N2,120,000)

What is the monthly PAYE tax payable?

PAYE TAX COMPLIANCE TIPS

Automate your payroll by using reliable payroll software that incorporates Nigerian PAYE rules.
Stay connected with tax regulatory changes. Constantly checking FIRS and SIRS websites for update.
Keep records of all remittances, returns, and communication with tax authorities.
Engage the service of tax professionals for accurate calculations and filing of returns.

IN SUMMARY

PAYE is a critical aspect of Nigerian tax system. Hence, it is essential that both employers and employees understand how it works to ensure total compliance. Irrespective of the size of your organization (large or small), staying on top of PAYE deductions and remittances can help you build trust with the relevant tax authorities and avoid unnecessary penalties.

NEED HELP WITH PAYE TAX COMPLIANCE?

At Greena Partners, we specialize in helping businesses across Nigeria manage their PAYE tax responsibilities. Whether you need help with payroll setup, monthly filings, or staff training, our tax professionals are here to support you.

Contact us today to schedule a free consultation (info@greenapartners.com)

At Greena, we pride ourselves with highly experienced and committed professionals willing and ready to collaborate with businesses to create value