Nigeria operates a federal tax system with responsibilities shared between the federal and state governments. While corporate income tax and Value Added Tax are primarily federal matters, personal income tax, including the Pay As You Earn (PAYE) system for employees, is administered by state tax authorities in the state where the individual resides. Employers play a critical role in this system by withholding income tax from employee salaries and remitting it to the relevant state tax authority, as well as managing and contributing to various social security and payroll-related funds.
Understanding these obligations is essential for compliant employment practices in Nigeria. Employers must navigate federal requirements for contributions like pensions and the National Housing Fund, alongside state-level administration of personal income tax. This dual structure necessitates careful attention to both federal regulations and the specific requirements of the state where employees are based.
Employer Social Security and Payroll Tax Obligations
Employers in Nigeria are required to contribute to several mandatory schemes on behalf of their employees, in addition to withholding income tax. These contributions are typically calculated based on an employee's gross salary or basic salary, depending on the specific scheme.
- Pension Contributions: Under the Contributory Pension Scheme, both employers and employees are required to contribute a minimum of 8% of the employee's monthly emoluments (basic salary, housing allowance, and transport allowance) to a Pension Fund Administrator (PFA). The total minimum contribution is 16% (8% employer, 8% employee), but employers can choose to contribute the full 16% themselves.
- National Housing Fund (NHF): Employers are required to deduct 2.5% of an employee's monthly basic salary and remit it to the Federal Mortgage Bank of Nigeria. This applies to employees earning NGN 3,000 or more per annum.
- Industrial Training Fund (ITF): Employers with five or more employees, or those with less than five employees but with an annual turnover of NGN 50 million or more, are required to contribute 1% of their annual payroll to the ITF.
- Nigeria Social Insurance Trust Fund (NSITF): Employers are required to contribute 1% of an employee's total monthly payroll to the NSITF, which administers the Employee Compensation Scheme (ECS). This scheme provides compensation to employees for injuries, diseases, or death sustained in the course of employment.
These contributions are generally deductible expenses for the employer for corporate income tax purposes.
Income Tax Withholding Requirements
Employers are responsible for operating the Pay As You Earn (PAYE) system, which involves deducting income tax directly from employee salaries and remitting it to the relevant state tax authority on a monthly basis. The personal income tax rates are progressive, meaning higher earners pay a higher percentage of their income in tax.
The tax is calculated on an employee's consolidated relief allowance (CRA) and other allowable deductions. The remaining taxable income is then subject to the following tax rates for 2025:
| Taxable Income (NGN) | Rate (%) |
|---|---|
| First 300,000 | 7 |
| Next 300,000 | 11 |
| Next 500,000 | 15 |
| Next 500,000 | 19 |
| Next 1,600,000 | 21 |
| Above 3,200,000 | 24 |
There is also a minimum tax provision: where the application of the above rates results in a tax lower than 1% of the employee's gross income, the employee is required to pay the minimum tax of 1% of gross income. Gross income for minimum tax purposes excludes income exempted by the Personal Income Tax Act (PITA).
Each state's internal revenue service is responsible for collecting PAYE tax from employers within their jurisdiction. While the tax rates and calculation methodology are uniform across states based on the federal PITA, administrative procedures and specific filing platforms may vary slightly by state.
Employee Tax Deductions and Allowances
Employees in Nigeria are entitled to certain deductions and allowances that reduce their taxable income under the PAYE system. The most significant is the Consolidated Relief Allowance (CRA).
The CRA is calculated as the higher of NGN 200,000 plus 20% of gross income, or 1% of gross income plus NGN 200,000. Gross income for CRA calculation is defined as income from all sources less all non-taxable income and income on which tax is final.
In addition to the CRA, employees can deduct mandatory contributions such as:
- Employee contributions to the Contributory Pension Scheme (minimum 8% of monthly emoluments).
- Employee contributions to the National Housing Fund (2.5% of basic salary).
- National Health Insurance Scheme (NHIS) contributions.
- Life assurance premiums (subject to certain conditions).
- Gratuities or terminal benefits are generally tax-exempt up to a certain limit or if paid under an approved scheme.
These deductions are subtracted from the employee's gross income before applying the tax rates.
Tax Compliance and Reporting Deadlines
Employers have specific deadlines for remitting withheld PAYE tax and filing returns.
- Monthly PAYE Remittance: PAYE tax withheld from employee salaries must be remitted to the relevant state tax authority by the 10th day of the following month. For example, tax withheld in January must be remitted by February 10th.
- Annual PAYE Returns: Employers are required to file an annual return (Form H1) summarizing the total emoluments paid and tax deducted for each employee during the preceding year. This return is typically due by January 31st of the assessment year (i.e., January 31st, 2026, for the 2025 tax year).
- Other Contributions: Deadlines for remitting pension, NHF, ITF, and NSITF contributions vary but are generally monthly or quarterly. Employers must adhere to the specific schedules provided by the administering bodies for each fund.
Failure to comply with these deadlines can result in penalties, interest, and potential legal action by the tax authorities or fund administrators.
Special Tax Considerations for Foreign Workers and Companies
Foreign workers and companies operating in Nigeria face specific tax considerations.
- Residency: An individual's tax residency status determines their tax obligations in Nigeria. Generally, an individual is considered resident for tax purposes if they are in Nigeria for 183 days or more in any 12-month period, including periods of temporary absence. Residents are taxed on their worldwide income, while non-residents are generally only taxed on income derived from Nigeria.
- Tax Treaties: Nigeria has double taxation treaties (DTTs) with several countries. These treaties can provide relief from double taxation and may affect the taxability of income for residents of treaty countries working in Nigeria. The provisions of a relevant DTT should be considered when determining the tax obligations of foreign workers.
- PAYE for Foreign Workers: If a foreign worker is considered tax resident in Nigeria, their employer is required to operate PAYE on their Nigerian-sourced income in the same way as for local employees. For non-residents, tax obligations depend on the nature and duration of their presence and work in Nigeria.
- Foreign Companies: Foreign companies operating in Nigeria may be subject to corporate income tax, VAT, and other taxes. If a foreign company has employees in Nigeria, it must comply with the same employer obligations regarding PAYE, pension, NHF, ITF, and NSITF as local companies, regardless of whether it has a permanent establishment in Nigeria for corporate tax purposes. Engaging an Employer of Record is a common strategy for foreign companies to manage these local employment tax and compliance requirements without establishing a local entity.
