Understanding Nigeria’s New PAYE Tax Law Effective January 2026

The Federal Government of Nigeria has signed into law sweeping changes to the Pay As You Earn (PAYE) tax system, set to take effect from January 1, 2026. This reform part of the 2025 Tax Reform Acts aims to simplify personal income taxation, ease the burden on low and middle income earners, and improve compliance across the country.

In this article, we will break down what the new law means for employees, employers, and the wider Nigerian economy.

Why the Change?

For years, Nigeria’s personal income tax regime relied on a structure that many considered complex and outdated. The Consolidated Relief Allowance (CRA) created confusion, and multiple lower tax bands meant workers often struggled to calculate their true liability.

The government, through the Nigeria Revenue Service (NRS) (which has replaced the FIRS), now seeks to introduce a more transparent system that:

• Raises the tax-free threshold to protect low earners.
• Simplifies tax bands into fewer, clearer categories.
• Improves efficiency in PAYE collection and compliance.

Key Features of the New PAYE Regime (From January 2026)

1. ₦800,000 Tax-Free Threshold

Every Nigerian worker earning up to ₦800,000 annually will pay zero income tax. This is a major boost for minimum wage and low-income earners, shielding them from PAYE deductions altogether.

2. New Progressive Tax Bands

From January 2026, the following rates will apply:

This progressive structure ensures that those who earn more contribute a larger share, while the middle class enjoys a fairer tax burden than under the previous law.

3. Rent Relief Introduced

Instead of the CRA, the new system allows workers to deduct 20% of gross annual income or ₦500,000 (whichever is lower) as rent relief. This recognizes housing as a major cost for Nigerian families.

4. Other Deductions Retained

Certain deductions remain allowable, including:

• Pension contributions (up to 8% of gross income).
• National Housing Fund (NHF) contributions (2.5%).
• Life assurance premiums (up to 15% of gross income or ₦100,000, whichever is lower).

What This Means for Nigerian Workers

1) Low-income earners (₦800,000 and below annually) will no longer pay PAYE tax.

2) Middle-income earners will benefit from clearer rates and deductions such as rent relief.

3) High-income earners (above ₦25 million annually) will see slightly higher rates, topping out at 25% for ultra-high earners.

Implications for Employers

Employers must update their payroll systems before January 2026 to reflect the new tax bands and deductions. This includes:

• Reprogramming payroll software.
• Training HR and finance staff on the new rules.
• Communicating clearly with employees about how their PAYE deductions will change.

Non-compliance may result in penalties under the new tax administration framework overseen by the NRS.

Wider Economic Impact

The reforms are expected to:

• Boost disposable income for workers, easing cost-of-living pressures.
• Simplify compliance, making it easier for businesses and employees to understand their obligations.
• Increase government revenue from high earners, helping to fund infrastructure and public services.

However, some analysts warn that the higher top rate of 25% could affect the take-home pay of top executives and entrepreneurs, potentially discouraging investment if not balanced with improved public services.

Conclusion

Nigeria’s new PAYE law represents one of the most significant tax reforms in recent years. By increasing the tax free threshold, introducing rent relief, and simplifying tax bands, the government hopes to make the system fairer and more transparent.

As January 2026 approaches, both workers and employers should familiarize themselves with the changes to avoid surprises. For employees, this reform could mean more money in your pocket and for employers, it means new responsibilities in payroll management.

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