Experts urge employers to conduct immediate gap assessment on payroll taxes, employer liability

LEGAL and tax experts are calling on employers across Nigeria to urgently review gaps in their payroll tax processes and employer liability exposure, warning that outdated systems and incomplete compliance with the country’s new personal income tax regime could trigger significant financial penalties and legal risks.

Nigeria’s overhaul of personal income tax rules, which took effect, on January 1, 2026, under the Nigeria Tax Act and Nigeria Tax Administration Act (NTA/NTAA), has replaced the long-standing Personal Income Tax Act framework. The reforms introduce a progressive six-band Pay As You Earn (PAYE) structure ranging from 0 per cent to 25 percent, abolish the Consolidated Relief Allowance, and replace it with a Rent Relief equal to 20 per cent of annual rent paid, capped at ₦500,000. The relief applies only where employees provide proof of payment through a receipt, lease agreement or employer-approved declaration.

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Several other changes have altered employer obligations. The 2.5 percent National Housing Fund deduction is now voluntary for private-sector employees; automatic deductions without informed consent fall outside the law. Gratuity, previously often treated as tax-exempt on exit, is now taxable income. The tax-free threshold for severance benefits has risen sharply from ₦10 million to ₦50 million. All forms of remuneration, including bonuses and 13th-month pay, fall within the PAYE base. Nigerian tax residents are taxed on worldwide income.

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In a joint position paper, legal practitioners at Genie, Olufunmilola Oyinkansola Binuyo and Habibat Abubakar, noted that employees now carry an independent duty to file annual personal income tax returns even where their employer has already submitted returns on their behalf, and even if the employee’s return shows nil or negative liability. Under the NTAA, unpaid or disputed PAYE assessments that are not objected to within the statutory window become final and binding. Penalties are administrative and compound monthly.

Compliance gaps are already appearing. Many payroll systems continue to apply the old tax bands and Consolidated Relief Allowance formula, producing systematically incorrect deductions. Some private-sector employers still deduct the National Housing Fund automatically. Gratuity continues to be paid without PAYE in some exit packages. Informal arrangements — contractors treated as employees, allowances paid outside payroll, or bonuses processed separately — create further audit exposure. Employers with remote or internationally mobile staff face additional complexity because Nigerian residents are now taxed on foreign-source income.

Experts advise employers to conduct an immediate gap assessment. Priority actions include updating payroll software for the new bands and rent-relief formula, documenting rent-relief claims properly, reviewing contractor classifications, recalculating benefits-in-kind under the new valuation rules, deducting PAYE from gratuity payments, and establishing processes for foreign-currency and cross-border remuneration. HR and payroll teams require training, and employers should maintain robust records and conduct regular compliance reviews.

“The reforms shift both calculation mechanics and liability allocation,” the practitioners stated. “Employers that treat the transition as a purely technical software update risk material financial and administrative consequences as the new regime beds in.”

With enforcement expected to intensify and tax codes under active review, specialists say a proactive audit now remains the fastest route for companies to identify underpayments, close exposure and avoid compounding penalties.