Computing an employee's personal income tax
An employee's tax is built in four steps: gather the income, take out what the Act does not tax, deduct the reliefs it allows, and apply the rates. The Nigeria Tax Act 2025 (NTA), in force from 1 January 2026 and examined on ICAN's updated syllabus, changed every step: the consolidated relief allowance and the old 7% to 24% bands in older texts no longer apply. ICAN usually lists pay, allowances and benefits, asks for the tax payable and asks you to explain one or two treatments, so you need both the layout and the reasons.
Employment income and the basis of assessment
Employment income includes salaries, wages, fees, allowances, compensations, bonuses, premiums, benefits and other perquisites, but not payments for expenses incurred in performing the duties from which the employee is not meant to profit (NTA s. 4(2)(a)); pensions and annuities are also income (s. 4(2)(b)). So a reimbursed hotel bill on an official trip is not income; a monthly allowance the employee keeps is. Cash emoluments are the money items: basic salary, housing, transport, utility and leave allowances, thirteenth-month pay, overtime, commission, bonuses and directors' fees.
The basis is the current year: employment income for a year of assessment (1 January to 31 December, s. 201) is the income of that year (s. 26(1)). Pay arises day by day, except a bonus, commission or allowance paid once or at intervals longer than a month, which is income of the day it is paid, or, if paid after the employment ends, of its last day, including any terminal benefit (s. 26(2)). A bonus for 2025 paid in February 2026 is income of 2026.
Benefits in kind
Where the employer spends money providing a benefit, NTA s. 14 values it as follows.
| Benefit | Annual taxable amount | Section |
|---|---|---|
| Use of an asset the employer owns (car, generator, furniture) | 5% of the employer's cost (or of market value when acquired, if cost is unknown), less anything the employee pays towards it | s. 14(1)(a), (2) |
| Use of an asset the employer rents or hires | The annual rent or hire the employer pays | s. 14(1)(b) |
| Any other benefit (driver, school fees, utility bills) | The annual amount the employer spends | s. 14(1)(c) |
| Living accommodation provided rent-free or at a rent below annual value | The annual rental value, capped at 20% of the employee's annual gross income from the employment excluding that rental value | s. 14(6), (7) |
Three benefits are left out completely: canteen meals for staff generally and meal vouchers; uniforms, protective clothing, work tools and equipment; and relocation costs on a change of job or place of work (s. 14(3)). A benefit for the employee's spouse, family, servant, dependant or guest counts as the employee's (s. 14(5)).
Annual value is the rental value fixed for local rates or, failing that, by the relevant tax authority, apportioned for part-year or part occupation (s. 14(7)). Read literally, s. 14(6) adds the full annual value, within the cap, even where the employee pays some rent; if a question gives rent paid, state your treatment.
Exempt income and non-chargeable gains
Several receipts common in employment are exempt under NTA s. 162(1):
| Exempt income | Section |
|---|---|
| Income from an employment where the employee's gross income from it is the national minimum wage or less | s. 162(1)(t), with s. 58 |
| Wages and salaries of military officers | s. 162(1)(u) |
| Emoluments of other ranks and personnel serving in combat zones, hazardous areas or designated operations | s. 162(1)(o) |
| Pensions, gratuities and retirement benefits granted under the Pension Reform Act | s. 162(1)(i) |
| Wound and disability pensions of the armed forces and of persons injured by enemy action | s. 162(1)(j) |
| Death gratuities and consolidated compensation for death or injury | s. 162(1)(k) |
| Redundancy lump sums and other capital compensation for loss of employment, subject to the chargeable gains rules | s. 162(1)(l) |
| Income earned from bonds issued by the Federal Government or a State | s. 162(1)(n) |
The minimum wage exemption. Section 58 applies the Fourth Schedule rates to every individual "other than an individual earning the Minimum Wage", and s. 162(1)(t) exempts employment income where the gross income from that employment is the national minimum wage or less. The wage itself is set under the National Minimum Wage Act, not the NTA (s. 201), so use the figure the question gives.
Compensation for loss of office. Up to ₦50,000,000 received as compensation for loss of office or employment, or for injury, is not a chargeable gain; only the excess is (NTA s. 50(1), (2)), and the payer deducts and remits the tax when it pays (s. 50(3)). Salary arrears, leave pay and bonuses due under the contract remain employment income.
Other non-chargeable gains of an employee include: one principal private residence, once in a lifetime, with up to one acre of adjoining land (s. 51); personal chattels sold for no more than the higher of ₦5,000,000 and three times the annual national minimum wage (s. 52); up to two private motor vehicles a year (s. 53); gifts (s. 54); and gains on investments in a national provident fund or retirement benefits scheme (s. 162(2)(a)(ii)).
From taxable income to total income: section 28(2)(b)
An individual's gross income is his total income from all sources in the year (NTAA s. 147). ICAN names each step of the NTA's structure:
| Step | Contents | Section |
|---|---|---|
| Taxable income | Trade profits, employment income, investment income, other income, chargeable gains | s. 28(2)(a) |
| Less: total deduction | Losses; capital allowances; exempt income; income taxed finally at source | s. 28(2)(b) |
| Total income | s. 28(1) | |
| Less: eligible deductions | See below | s. 30(2)(a) |
| Chargeable income | s. 30(1) | |
| Income tax | Fourth Schedule rates | s. 58 |
For an employee, the key s. 28(2)(b) items are exempt income (such as Federal Government bond interest) and income taxed finally at source, such as dividends from Nigerian companies received after deduction of tax (franked investment income, NTAA s. 51(3)). Losses and capital allowances matter to traders (lessons 4 and 5).
There is no deduction for an employee's own expenses: s. 20 allows expenses of a trade, business, profession or vocation, not of an employment, so commuting costs or work clothes the employee buys are not deductible. Business expenses the employer reimburses never enter income (s. 4(2)(a)).
Eligible deductions and rent relief
Eligible deductions are payments the individual makes in the year of assessment for (NTA s. 30(2)(a)):
- contributions to the National Housing Fund, the National Health Insurance Scheme, and under the Pension Reform Act;
- interest on loans for developing an owner-occupied residential house;
- life assurance or deferred annuity premiums on the individual's or the spouse's life, paid during the year preceding the year of assessment;
- rent relief of 20% of the annual rent paid, up to a maximum of ₦500,000, provided the individual declares the actual rent paid and any other information the relevant tax authority prescribes.
Rent relief is now the main personal relief, in place of the old consolidated relief allowance.
The Fourth Schedule rates
Chargeable income is taxed in bands (NTA s. 58 and Fourth Schedule):
| Band of chargeable income | Rate | Tax on the band | Cumulative tax at top of band |
|---|---|---|---|
| First ₦800,000 | 0% | 0 | 0 |
| Next ₦2,200,000 (to ₦3,000,000) | 15% | 330,000 | 330,000 |
| Next ₦9,000,000 (to ₦12,000,000) | 18% | 1,620,000 | 1,950,000 |
| Next ₦13,000,000 (to ₦25,000,000) | 21% | 2,730,000 | 4,680,000 |
| Next ₦25,000,000 (to ₦50,000,000) | 23% | 5,750,000 | 10,430,000 |
| Above ₦50,000,000 | 25% |
Proof of claims, returns and penalties
A deduction is allowed only if claimed in writing in the prescribed form (NTA s. 31). The authority may demand documentary evidence (pension and NHF statements, tenancy agreement, rent receipts) and refuse an unsupported claim in whole or part (s. 32(1)). An objection to an assessment or a PAYE rate must enclose the available evidence or a declaration that none exists; evidence produced later leads to a repayment, set-off or reduced assessment (s. 32(2)).
Returns. The employer files a return of all emoluments paid in the preceding year by 31 January, showing for each employee gross emoluments including benefits in kind, total deductions, net emoluments and tax deducted (NTAA s. 14(1), (2)), and monthly returns of tax deducted as the regulations specify (s. 28). The employee still files an annual return of income from all sources (s. 14(3)): a self-assessment form, the income, the reliefs and tax computation, and evidence of payment (s. 13). Section 13 sets no calendar date for individuals (older texts give the 90 days of the repealed Personal Income Tax Act), so use the date the authority prescribes or the question gives. Simplified returns for low-income earners may be allowed by guidelines (s. 15).
Main penalties (NTAA).
| Default | Consequence | Section |
|---|---|---|
| Failure to file a return | ₦100,000 for the first month, ₦50,000 for each further month | s. 101 |
| Employer fails to deduct PAYE | 40% of the amount not deducted | s. 105 |
| Employer deducts but does not remit by the 21st of the following month | The tax, plus 10% a year of it, plus interest at the CBN monetary policy rate; on conviction, up to three years' imprisonment or a fine, or both | s. 107 |
| Tax not paid when due | 10% of the tax, plus interest at the CBN monetary policy rate plus a spread set by the Minister | s. 65(1) |
| False declaration | ₦1,000,000 plus the tax undercharged | s. 124 |
Worked example
Example 1: Mrs Ngozi Eze, finance manager of Mararaba Logistics Ltd, Abuja. For 2026: basic salary ₦7,200,000; housing allowance ₦2,400,000; transport allowance ₦1,200,000; leave allowance ₦600,000; bonus for 2025 paid in February 2026 ₦900,000. The company provides a car it bought for ₦18,000,000, a driver costing ₦1,440,000 a year and free canteen lunches, and reimbursed ₦350,000 of hotel bills on official trips. She received ₦400,000 of Federal Government bond interest and ₦300,000 (gross) of dividends from a Nigerian company, taxed at source. She paid pension contributions of ₦864,000, National Housing Fund contributions of ₦180,000 and rent of ₦3,000,000, and in 2025 a life assurance premium of ₦250,000.
Mrs Ngozi Eze: personal income tax computation, year of assessment 2026
| ₦ | ₦ | |
|---|---|---|
| Basic salary | 7,200,000 | |
| Housing allowance | 2,400,000 | |
| Transport allowance | 1,200,000 | |
| Leave allowance | 600,000 | |
| Bonus paid February 2026 (s. 26(2)) | 900,000 | |
| Cash emoluments | 12,300,000 | |
| Car: 5% × ₦18,000,000 (s. 14(1)(a)) | 900,000 | |
| Driver: amount spent (s. 14(1)(c)) | 1,440,000 | 2,340,000 |
| Employment income | 14,640,000 | |
| Federal Government bond interest | 400,000 | |
| Dividends (gross) | 300,000 | |
| Taxable income (s. 28(2)(a)) | 15,340,000 | |
| Less total deduction (s. 28(2)(b)): exempt bond interest (s. 162(1)(n)) | (400,000) | |
| Less total deduction: dividends taxed finally at source (NTAA s. 51(3)) | (300,000) | (700,000) |
| Total income | 14,640,000 | |
| Less eligible deductions (W1) | (1,794,000) | |
| Chargeable income | 12,846,000 |
| Income tax (Fourth Schedule) | ₦ |
|---|---|
| First 800,000 × 0% | 0 |
| Next 2,200,000 × 15% | 330,000 |
| Next 9,000,000 × 18% | 1,620,000 |
| Balance 846,000 × 21% | 177,660 |
| Income tax for 2026 | 2,127,660 |
W1 Eligible deductions (s. 30(2)(a)): pension ₦864,000 + National Housing Fund ₦180,000 + rent relief ₦500,000 + life assurance premium paid in 2025 ₦250,000 = ₦1,794,000. Rent relief is 20% × ₦3,000,000 = ₦600,000, restricted to the ₦500,000 maximum.
Notes: canteen meals are excluded (s. 14(3)(a)) and the hotel reimbursements are not income (s. 4(2)(a)). Monthly PAYE is ₦2,127,660 ÷ 12 = ₦177,305, so the year's deductions equal her tax (NTAA s. 51(7)).
Example 2: Mr Ibrahim Danjuma, operations manager of a manufacturer in Kano. For 2026: basic salary ₦14,400,000; transport allowance ₦2,400,000; utility allowance ₦1,200,000; thirteenth-month pay ₦1,200,000; performance bonus paid March 2026 ₦3,000,000. His employer pays his children's school fees of ₦2,000,000, put a generator it bought for ₦3,000,000 at his home, supplies safety boots and overalls, reimbursed ₦850,000 of hotel bills on official trips, and provides a company house with an annual rental value of ₦6,000,000, rent-free. He paid pension contributions of ₦1,440,000, National Housing Fund ₦360,000, National Health Insurance Scheme ₦120,000, and ₦900,000 of interest on the loan with which he built his family home in Kaduna, which he owns.
Mr Ibrahim Danjuma: personal income tax computation, year of assessment 2026
| ₦ | ₦ | |
|---|---|---|
| Basic salary | 14,400,000 | |
| Transport allowance | 2,400,000 | |
| Utility allowance | 1,200,000 | |
| Thirteenth-month pay | 1,200,000 | |
| Performance bonus (paid March 2026) | 3,000,000 | 22,200,000 |
| School fees: amount spent (s. 14(1)(c), (5)) | 2,000,000 | |
| Generator: 5% × ₦3,000,000 (s. 14(1)(a)) | 150,000 | 2,150,000 |
| Gross income from the employment excluding the house | 24,350,000 | |
| Accommodation (W1) | 4,870,000 | |
| Taxable income = total income | 29,220,000 | |
| Less eligible deductions (W2) | (2,820,000) | |
| Chargeable income | 26,400,000 |
| Income tax (Fourth Schedule) | ₦ |
|---|---|
| First 800,000 × 0% | 0 |
| Next 2,200,000 × 15% | 330,000 |
| Next 9,000,000 × 18% | 1,620,000 |
| Next 13,000,000 × 21% | 2,730,000 |
| Balance 1,400,000 × 23% | 322,000 |
| Income tax for 2026 | 5,002,000 |
W1 Accommodation (s. 14(6)): annual rental value ₦6,000,000, capped at 20% × ₦24,350,000 = ₦4,870,000, so the benefit is ₦4,870,000. The gross income used for the cap includes the other benefits; state that reading in your answer.
W2 Eligible deductions (s. 30(2)(a)): pension ₦1,440,000 + National Housing Fund ₦360,000 + National Health Insurance Scheme ₦120,000 + interest on the loan to develop his owner-occupied house ₦900,000 = ₦2,820,000. He pays no rent, so there is no rent relief.
Notes: boots and overalls are excluded (s. 14(3)(b)); with no exempt income, total income equals taxable income. Monthly PAYE is ₦5,002,000 ÷ 12 = ₦416,833.
Common mistakes
- Using the old consolidated relief allowance or 7% to 24% bands; the reliefs are in s. 30 and the rates in the Fourth Schedule.
- Giving rent relief without the ₦500,000 maximum, or to someone who pays no rent.
- Valuing an employer-owned car at its full cost or running cost instead of 5% of the employer's cost.
- Forgetting the 20% cap on accommodation, or computing it on gross income that already includes the rental value.
- Including exempt income or franked dividends in chargeable income, or leaving out a bonus because it relates to the previous year.
- Deducting a life assurance premium paid in the year of assessment itself; the Act allows the premium paid in the preceding year.
Exam technique
Head the answer with the taxpayer's name and the year of assessment, then follow the Act's order as in the examples. Label every figure with its section and put any multi-step figure in a numbered working. Say why an item is left out: "canteen meals: excluded, s. 14(3)(a)" earns a mark that a silent omission does not. Use the paper's table of rates if it prints one, but know the layout without it.
Study with AI
I am studying ICAN Taxation (B3), area C1, under the Nigeria Tax Act 2025. Set me a
personal income tax question for an employee for the year of assessment 2026 with cash
emoluments, an employer-owned car, an employer-paid expense, a company house, Federal
Government bond interest, franked dividends, pension and NHF contributions, rent paid
and a life assurance premium. Wait for my computation, then check it line by line
against sections 14, 28, 30 and the Fourth Schedule of the Act.AI makes arithmetic slips and may apply the repealed Act's reliefs: check every answer against these notes and the Act.
Lecturer's note: Under the old law, a large flat relief removed a slice of everyone's income before the bands began. Under the NTA the relief is built into the rates (the first ₦800,000 bears no tax), and personal reliefs are confined to the payments in s. 30. So the marks now turn on two things: what goes into employment income (ss. 4 and 14) and which payments are eligible deductions (s. 30). Get those right and the bands are mechanical.
Key points
- Employment income is the income of the year of assessment; one-off bonuses are income of the day they are paid (NTA s. 26).
- Benefits: 5% of the cost of employer-owned assets, the rent or hire of hired assets, the amount spent on anything else, and accommodation at annual value capped at 20% of gross employment income (s. 14).
- Taxable income less the s. 28(2)(b) deductions (losses, capital allowances, exempt income, income taxed finally at source) gives total income.
- Less eligible deductions (NHF, NHIS, pension, owner-occupier interest, last year's life premiums, rent relief of 20% up to ₦500,000) gives chargeable income (s. 30).
- Rates are 0%, 15%, 18%, 21%, 23% and 25% (Fourth Schedule); minimum wage earners are exempt (ss. 58, 162(1)(t)).
Quick check
- Chinwe's chargeable income for 2026 is ₦4,500,000. What is her income tax?
- Musa lives in a company flat with an annual rental value of ₦3,000,000. His gross income from the employment, excluding the flat, is ₦12,000,000. What is the accommodation benefit?
- Mr Ade Oyelaran receives ₦62,000,000 as compensation for loss of his job. How much of it is a chargeable gain, and who must deduct the tax?
Answers
- ₦330,000 on the first ₦3,000,000, plus (₦4,500,000 − ₦3,000,000) × 18% = ₦270,000: total ₦600,000 (Fourth Schedule).
- The cap is 20% × ₦12,000,000 = ₦2,400,000, which is less than the annual value of ₦3,000,000, so the benefit is ₦2,400,000 (NTA s. 14(6)).
- The first ₦50,000,000 is not a chargeable gain; the excess of ₦12,000,000 is (NTA s. 50(1), (2)). The employer paying the compensation must deduct and remit the tax at the point of payment (s. 50(3)).