1.1 How Payroll Works in Nigeria (Start Here)
Payroll is the process of calculating what each employee has earned, deducting what the law and the employee require, paying the net amount and paying the deductions over to the right authorities on time. It combines law, arithmetic, data and deadlines, and a mistake in any one of them reaches every employee, every month.
The payroll cycle
- Collect inputs: new starters, leavers, changes in pay, overtime, leave and deductions, up to a fixed cut-off date.
- Calculate gross pay: basic pay plus allowances, overtime and taxable benefits.
- Calculate statutory deductions: PAYE, social security and any other deductions the law requires.
- Apply other deductions: pension, medical aid, loans, union dues and other authorised items.
- Review and approve: compare with last month and investigate every unexplained change.
- Pay net salaries and issue payslips.
- Remit and file: pay each authority and lodge the returns by the due dates.
- Reconcile and archive: check that payroll, returns, bank and ledger agree, and keep the records.
The four outputs of every pay run
- Payslips: a written record of earnings, deductions and net pay for each employee.
- Payments: net pay to bank accounts or mobile wallets.
- Remittances: amounts deducted or levied, paid to the authorities and third parties.
- Records and reports: the payroll register, ledger journals and statutory returns.
Who receives what
| Deduction or levy | Paid to | Who bears it |
|---|---|---|
| PAYE | The State Internal Revenue Service (State IRS) of the employee’s state of residence; the Nigeria Revenue Service (NRS) for some groups, such as non-residents | Employee (employer withholds it) |
| Pension | The Pension Fund Custodian named by the employee’s Pension Fund Administrator (PFA) | Employee and employer |
| Employees’ Compensation | Nigeria Social Insurance Trust Fund (NSITF) | Employer only |
| Industrial Training Fund (ITF) levy | ITF | Employer only, if in scope |
| Group life insurance | An insurer | Employer only |
| National Housing Fund (NHF) | Federal Mortgage Bank of Nigeria | Employee (voluntary for private-sector staff) |
| Health insurance | NHIA, a state scheme or an HMO | Depends on the scheme (lesson 4.2) |
Under the Labour Act, wages must be paid in legal tender, so Nigerian payrolls run in naira.
Key terms
- Gross pay: everything the employee earned in the period before deductions.
- Taxable pay: gross pay plus taxable benefits, less exempt amounts and allowable deductions. PAYE is calculated on this.
- Statutory deductions: deductions the law requires, such as PAYE and the employee’s share of social security.
- Voluntary deductions: deductions the employee has agreed to in writing, such as medical aid, union dues or loan repayments.
- Net pay: what the employee actually receives.
- Employer cost: what the employer pays on top of gross pay, such as its own social security share and payroll levies.
Why payroll is high-risk
- It repeats. A wrong setting is wrong for every employee, every month, until someone notices.
- It involves cash. Payroll is one of the most common targets of internal fraud.
- It is regulated. Each authority charges penalties and interest on late or short payments.
- It is personal. Few things damage trust faster than a wrong payslip.
A good payroll professional does not trust the system blindly. By the end of this course you will be able to recalculate any payslip by hand.
How figures are used in this course
Tax bands, contribution rates, ceilings and deadlines in the lessons are examples of the law as at 2026. They are not permanent rules: Nigeria changes payroll law through budgets, Finance Acts, regulations and official notices. All the figures are gathered in a Course reference table at the end of lesson 5.4, dated so you can see how old they are.
Make it a habit to check official channels before every payroll run that follows a change.
Example: An oil-services contractor in Port Harcourt with 85 staff closes payroll inputs on the 20th of each month. The payroll officer, Ngozi Obi, runs the payroll on the 22nd, the finance manager approves it on the 23rd and salaries are paid on the 25th. Ngozi then remits pension to each employee’s custodian, pays PAYE to the Rivers State IRS for staff living in Rivers State and to the Lagos State IRS for the two engineers who live in Lagos, and pays the NSITF contribution. When the new tax Acts took effect in January 2026, she loaded the new bands before the first payroll and checked three payslips by hand.
Check before you act: Figures and time limits here are 2026 examples, not fixed rules, and are expected to change. Confirm the current position with the State IRS, the NRS, PenCom, NSITF, the Ministry of Labour, the Official Gazette or a registered tax or payroll practitioner.
Key takeaway
Payroll is a monthly cycle of calculating, approving, paying, remitting and reconciling, with several authorities to satisfy. Treat every rate as current only until the law changes, and check before each run.
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