Payroll taxes and employer liability: Closing the compliance gap under Nigeria's new tax regime

At a glance

• Nigeria's payroll tax rules changed from 1 January 2026 under the Nigeria Tax Act and Nigeria Tax Administration Act (together, the NTA / NTAA), and payroll systems still using the old bands are producing incorrect deductions.
• Pay As You Earn (PAYE) now runs on a progressive six-band structure of 0% to 25%. The new tax regime also replaces the Consolidated Relief Allowance (CRA) with a Rent Relief that requires proof of rent payment.
• National Housing Fund (NHF) deductions are now voluntary for private sector employees, gratuity is now taxable, and the severance tax-free threshold has risen to NGN50,000,000.
• Employees now have an independent duty to file personal tax returns even where their employer has already filed on their behalf.
• Penalties for non-compliance are now administrative and compound monthly, and unresolved PAYE assessments become final and binding if not objected to in time.

Background

Nigeria's tax architecture has changed but some employer payroll systems have not caught up. The NTA / NTAA, took effect on 1 January 2026 and redefined significant aspects of how PAYE operates. Every payroll from 1 January 2026 must apply the revised tax bands, reliefs, and rules on taxable income, and the reforms require employers to reassess employee remuneration, including allowances, bonuses, expatriate remuneration, and benefits in kind. Under the old regime, PAYE was under the Personal Income Tax Act (PITA), with bands from 7% to 24%, and relief calculated through the CRA. The NTA replaces this with a more progressive structure, with six tax bands running from 0% to 25%, and the CRA has been replaced by Rent Relief, equal to 20% of annual rent paid, capped at NGN500,000, which is conditional and only applies where the employee can prove rent payment with a receipt, lease agreement, or an employer-approved rent declaration.

Several other changes reshape what employers are dealing with. For private sector employees, the 2.5% NHF deduction is now voluntary, and employers who continue deducting it automatically, without the employees' informed consent, are operating outside the current law. Gratuity, which used to be exempt when paid to exiting employees, is now taxable income under the NTA, while severance benefits have become more generous, with the tax-free threshold risen from NGN10,000,000 to NGN50,000,000. The NTA also brings all forms of remuneration, including bonuses and 13th-month pay, into the PAYE base, and Nigerian tax residents are now taxed on worldwide income, not just income earned within Nigeria. On liability, the NTAA settles the long-standing ambiguity from the old PITA framework: employees now have an independent duty to file their personal annual return, even where already filed by employer, and even where the employee's return shows nil or negative liability.

Key compliance issues and risks

• A common compliance gap is running payroll on the old bands and CRA formula, because payroll software has not been updated since the transition, and this gap produces systematically wrong PAYE figures for every employee.
• Employers in the private sector who continue deducting NHF automatically, without the employees' informed consent, are operating outside the current law.
• Gratuity is still routinely paid out as if it were tax-exempt, and this is one of the more expensive mistakes to make as it exposes employers to retrospective liabilities.
• Nigerians working remotely for foreign employers, and employees with income from abroad, are one of the significant, less-discussed changes in the new law. Employers with internationally mobile or seconded employees need to consider how they think about compliance risk, even where the employer is not the one making the payment.
• Where an employer fails to object to a PAYE assessment within the statutory window, that assessment becomes final and conclusive, leaving the employer liable for the assessed tax, together with applicable penalties and interest, regardless of whether the original assessment was accurate.
• There is a blind spot around informal arrangements, where contractors are being treated as employees, with allowances paid outside the payroll system, and 13th-month or bonus payments processed separately from the main payroll without being included in the PAYE calculation, all of which create significant exposure during audits.

Takeaways for employers

• Bridging the compliance gap starts with an honest assessment of how your current systems measure up against the new laws.
• Update payroll systems to reflect the new six-band structure and rent relief formula.
• During recruitment and onboarding, verify employees’ tax identification numbers and address any tax registration gaps.
• Put a clear process in place to document rent relief so eligible employees can benefit from it.
• Regularly review employment classifications to ensure that anyone classified as a contractor genuinely meets the criteria and is not effectively working as an employee.
• Recalculate taxable benefits-in-kind using the new 5%-of-cost valuation cap.
• Review how gratuity is calculated in exit packages and ensure PAYE is deducted before payment.
• Identify all foreign currency and cross-border cases. Confirm how FX salaries should be converted to Naira and determine which employees have worldwide income obligations.
• Provide regular training for HR and payroll teams so they understand and can apply the new tax framework.
• Maintain accurate records and carry out regular compliance reviews.

It is noteworthy that none of these replace the need to stay current as the law continues to be interpreted and applied over the course of the year.