How To Calculate Personal Income Tax

In Nigeria, Personal Income Tax (PIT) is governed by the Personal Income Tax framework under the new Nigeria Tax Law (effective January 2026) and administered by State Internal Revenue Services.

The main types of personal income tax include:

1. Pay-As-You-Earn (PAYE)
This is the most common form of personal income tax. It applies to individuals earning salaries or wages, where the employer deducts tax at source and remits it to the relevant tax authority.

Unlike the old system, PAYE is now calculated using a new progressive tax structure with a tax-free threshold.

The updated PAYE structure is as follows:

First ₦800,000 @ 0%
Next ₦2,200,000 @ 15%
Next ₦9,000,000 @ 18%
Next ₦13,000,000 @ 21%
Next ₦25,000,000 @ 23%
Above ₦50,000,000 @ 25%

Let’s uncover the PAYE deduction for an employee whose monthly gross income is ₦100,000.

Unlike flat-rate taxes, PAYE is determined using a progressive structure

To subject income to PAYE, we first convert monthly income to annual income:

👉 Step 1: Convert monthly gross pay to annual
₦100,000 × 12 = ₦1,200,000

👉 Step 2: Identify the tax-free portion under the new law
The first ₦800,000 of annual income is tax-free.

So we remove ₦800,000 from the gross income:

₦1,200,000 − ₦800,000 = ₦400,000 taxable income

👉 Step 3: Apply the progressive tax structure
Now we apply tax only on the remaining ₦400,000:

₦400,000 @ 15% = ₦60,000

So the total annual PAYE is ₦60,000.

👉 Step 4: Convert annual PAYE to monthly PAYE
₦60,000 ÷ 12 = ₦5,000 monthly PAYE

👉 Step 5: Compute monthly net pay
Monthly gross salary − monthly PAYE:

₦100,000 − ₦5,000 = ₦95,000

So the employee’s monthly net pay is ₦95,000.

2. Withholding Tax (WHT)
Withholding Tax is the specified amount deducted at source from payments made to contractors or self-employed individuals for services rendered.

The WHT rate for individuals providing services remains 5%.

Let’s uncover the WHT deduction for a contractor earning ₦100,000 monthly.

👉 Step 1: Convert monthly gross pay to annual
₦100,000 × 12 = ₦1,200,000

👉 Step 2: Apply the WHT rate
5% × ₦1,200,000 = ₦60,000 annual WHT

👉 Step 3: Convert annual WHT to monthly
₦60,000 ÷ 12 = ₦5,000 monthly WHT

👉 Step 4: Compute monthly net pay
₦100,000 − ₦5,000 = ₦95,000

So the contractor’s monthly net pay after WHT is ₦95,000.

Final Insight
Under the new Nigeria tax law:

• The first ₦800,000 of income is completely tax-free
• Only income above that threshold is taxed progressively
• Low-income earners now experience significantly lower tax burden
• PAYE becomes more simplified for payroll computation systems