Nigeria rewrote its payroll tax system on 1 January 2026, and the country’s pension regulator entered what its own Director-General publicly called “a new era of zero tolerance.” Those two facts, taken together, mean payroll compliance in Nigeria is no longer a background administrative task. It’s an active area of enforcement, with real money changing hands between defaulting employers and the regulators chasing them.

This report pulls together what’s actually known about how Nigerian SMEs are handling payroll compliance right now: where the data exists, where it doesn’t, and what the enforcement numbers say about the size of the gap. Where credible data was unavailable, we’ve said so directly rather than filling the space with a vendor statistic that couldn’t be verified.

What changed, and why it matters for compliance

The Nigeria Tax Act 2025, signed into law in June 2025 and in effect since 1 January 2026, replaced the decades-old Personal Income Tax Act framework. The Consolidated Relief Allowance is gone. The old 1% minimum tax is gone. In their place: a 0% band on the first ₦800,000 of annual income, then rates climbing from 15% to 25% above that, and a new Rent Relief deduction (20% of rent paid, capped at ₦500,000) that must be claimed in writing rather than applied automatically.[1]

FIRS was renamed the Nigeria Revenue Service under a separate 2025 Act, and a new Joint Revenue Board now coordinates federal and state tax authorities[2]. None of this is cosmetic. Payroll systems, spreadsheets included, that were still running the old CRA formula after January 2026 were producing incorrect PAYE figures with complete confidence, which is a compliance problem in its own right.

How Nigerian SMEs currently handle payroll: the honest data gap

Here’s the first thing worth saying plainly: no credible, methodologically sound survey has measured how Nigerian SMEs actually run payroll, manual, software, or outsourced, with reliable percentages attached. Anyone citing a specific split (“65% still use manual methods,” for instance) is repeating a number that traces back to vendor blog content rather than an actual study. We looked for the source and couldn’t verify it, so we’re not using it here.

What does exist is more indirect, but still telling. PwC Nigeria’s 2024 MSME Survey, covering 557 businesses across 13 sectors and 29 states, found that only around 1% of respondents listed personal income tax, which includes PAYE, among the taxes they actually pay, against 64% for VAT and 56% for company income tax.[3] That’s not a compliance rate in the strict sense. It’s a survey response about which taxes businesses believe they’re paying. But it’s a strong hint that PAYE is dramatically under-reported and, by extension, under-remitted among Nigerian SMEs.

The same survey found that 83% of respondents are formally registered with the Corporate Affairs Commission, and just under half outsource their regulatory compliance work in some form. Registration and compliance aren’t the same thing, and the gap between them is where a lot of payroll risk sits.

This is worth treating as an opportunity as much as a gap. Nobody has published a clear picture of how Nigerian SMEs actually handle payroll compliance, which means the businesses (and platforms) willing to ask that question directly are working with better information than most of the market.

The most common compliance failures

While there’s no measured frequency for each of these, they show up consistently across practitioner guidance, enforcement commentary, and the rule changes themselves.

Still applying 2025 rules in 2026. Payroll templates and spreadsheets built around the old Consolidated Relief Allowance didn’t automatically update when the law changed on 1 January. Several payroll platforms have publicly warned that employers still using the old 1% minimum tax calculation are, in their words, automatically non-compliant.[4]

Treating Rent Relief as automatic. Under the new law, Rent Relief has to be claimed in writing. An employer[5] who simply applies it without a written claim on file, or who ignores it entirely and over-deducts an employee’s PAYE, is getting the calculation wrong in either direction.

Remitting PAYE to the wrong state. PAYE is owed to the State Internal Revenue Service of the employee’s state of residence, not the state where the company’s head office sits.[6] This becomes a real problem for businesses with remote staff or teams spread across multiple states, and it’s a mistake that’s easy to make without meaning to.

Getting the pension base wrong. The minimum pension contribution, 8% from the employee and 10% from the employer, is meant to apply to basic salary, housing, and transport allowance combined, not basic salary alone.[7] Practitioner guidance repeatedly flags employers calculating pension on too narrow a base, or remitting only the employee’s share and skipping the employer’s contribution entirely.

Missing the seven-working-day pension window. Pension contributions are due to the Pension Fund Custodian within seven working days of salary payment. When cash flow[8] is tight, this is one of the easiest deadlines to quietly push back, and one of the most heavily enforced.

Missing the annual PAYE return. Lagos State’s revenue authority has been explicit that the 31 January employer annual return deadline applies “even if PAYE deductions have been remitted” monthly.[9] Paying on time each month doesn’t substitute for filing the annual return.

How hard enforcement actually is right now

This is the part of the picture that’s changed most visibly. Nigeria’s payroll regulators moved from occasional enforcement to active, ongoing recovery over the course of 2025 and 2026.

The National Pension Commission has recovered ₦32.75 billion from defaulting employers cumulatively, as of its most recent quarterly reporting. Of that, ₦16.63 billion, slightly more than half, was penalties rather than the unpaid contributions themselves. In the third quarter of 2025 alone, 49 employers paid ₦2.06 billion, with penalties (₦1.27 billion) outweighing the principal owed (₦775 million).[10]

In December 2025, PenCom’s Director-General described a new “zero tolerance” posture at a training session[11] for the commission’s accredited Recovery Agents in Lagos, with plans to tie pension compliance to good standing with other regulators, including the Corporate Affairs Commission.[12] In October 2025, PenCom signed a formal agreement with the Independent Corrupt Practices and Other Related Offences Commission, and by July 2026 the two bodies had jointly recovered more than ₦3 billion from employers in the electricity sector specifically, with further investigations reportedly ongoing.[13]

On the tax side, Lagos State’s revenue service activated its “power of substitution” in January 2026, a legal mechanism that lets it collect tax owed directly from a defaulter’s bank, tenants, customers, or debtors, rather than relying solely on the employer to pay voluntarily.[14] That’s a meaningfully more aggressive enforcement posture than existed even two years ago.

What share of SMEs are actually non-compliant?

We want to be direct about this: no regulator, and no independent research body, has published a reliable estimate of what percentage of Nigerian SMEs are non-compliant with payroll obligations. It’s a genuine data gap, not an oversight on our part.

What we can say is that the scale of the underlying population makes even a modest non-compliance rate significant. Nigeria has an estimated 39.65 million micro, small, and medium enterprises, the vast majority of them micro-sized.[15] Against that, Nigeria has just over 11 million Retirement Savings Account holders across the entire pension system, public and private sector combined. In a single quarter, PenCom issued just over 7,000 electronic Pension Clearance Certificates, covering roughly ₦156 billion in verified remittances for under 250,000 employees.[16] That’s a small fraction of Nigeria’s total registered workforce.

The head of the Pension Fund Operators Association of Nigeria said publicly in 2026 that a large share of organized private-sector employers are “still dragging their feet” on pension enrollment[17] specifically to manage costs. Taken together, these figures point toward a large compliance gap, even without a precise number attached to it.

Regional and sector patterns

There’s no published breakdown of payroll compliance in Nigeria by region or industry. The one sector-specific enforcement signal available is the electricity sector, where PenCom and the ICPC’s joint recovery effort has been publicly documented. Lagos is the only state with clearly visible, dated enforcement activity on the tax side, which likely reflects LIRS’s administrative capacity more than it reflects Lagos businesses being unusually non-compliant relative to the rest of the country.

What this means for SME owners

The single clearest signal in this report is the gap between what employers deduct and what actually reaches the regulator, and how expensive that gap has become to leave open. Penalties on unpaid pension contributions alone have outpaced the unpaid contributions themselves in at least one recent quarter. That’s not a rounding error. It’s a sign that enforcement has caught up with, and in some cases overtaken, the actual scale of non-compliance.

For a small business owner, the practical takeaway isn’t complicated: the rules changed in January, the deadlines haven’t moved, and the cost of missing them is now being actively collected rather than quietly written off. Payroll compliance in Nigeria in 2026 rewards businesses that treat the calendar, and the calculation, as seriously as the regulators now do.

This report draws on PenCom quarterly reports, PwC Nigeria’s 2024 MSME Survey, and current statutory text under the Nigeria Tax Act 2025 and the Pension Reform Act 2014. Where Nigerian-specific data doesn’t yet exist, this has been stated explicitly rather than substituted silently.

References

1. [1]  Nigeria Tax Act, 2025. Official Gazette [Internet]. Lagos State Internal Revenue Service; 2025 [cited 2026 Sep 30]. Available from: lirs.gov.ng
2. [2]  Nigeria Revenue Service (Establishment) Act, 2025 [Internet]. KPMG Nigeria; 2025 Jul [cited 2026 Sep 30]. Available from: assets.kpmg.com
3. [3]  PwC Nigeria. MSME Survey 2024: Building resilience — strategies for MSME success in a changing landscape [Internet]. 2024 Jul [cited 2026 Sep 30]. Available from: pwc.com/ng
4. [4]  What you need to know about the new PAYE tax law in Nigeria [Internet]. BizEdge; 2026 [cited 2026 Sep 30]. Available from: bizedgeapp.com
5. [5]  Rent Relief under NTA 2025: how Nigerian employees cut their PAYE [Internet]. AnooreHR; 2026 [cited 2026 Sep 30]. Available from: anoorehr.com
6. [6]  How to file tax on the LIRS eTax portal: a step-by-step guide [Internet]. TechCabal; 2026 Apr 2 [cited 2026 Sep 30]. Available from: techcabal.com
7. [7]  A decade post the Pension Reform Act 2014: any need for change? [Internet]. AO2LAW; [cited 2026 Sep 30]. Available from: ao2law.com
8. [8]  Pension Reform Act 2014: the good, the bad and the ugly [Internet]. BusinessDay NG; [cited 2026 Sep 30]. Available from: businessday.ng
9. [9]  Lirs demands 31 January deadline for employers’ annual tax returns filing [Internet]. AllAfrica; 2026 Jan 16 [cited 2026 Sep 30]. Available from: allafrica.com
10. [10]  Employers forced to pay N16bn in penalties for pension remittance defaults [Internet]. BusinessDay NG; 2026 [cited 2026 Sep 30]. Available from: businessday.ng
11. [11]  PenCom announces new era of zero tolerance for pension defaults [Internet]. BusinessDay NG; 2025 Dec [cited 2026 Sep 30]. Available from: businessday.ng
12. [12]  PenCom training workshop for Recovery Agents on recovery of unpaid pension contributions [Internet]. PensionNigeria; 2025 Dec [cited 2026 Sep 30]. Available from: pensionnigeria.com
13. [13]  PenCom, ICPC recover N3 billion in unremitted pension contributions from electricity sector employers [Internet]. Nairametrics; 2026 Jul 1 [cited 2026 Sep 30]. Available from: nairametrics.com
14. [14]  Lagos Revenue Service activates power of substitution to boost tax recovery [Internet]. AllAfrica; 2026 Jan 28 [cited 2026 Sep 30]. Available from: allafrica.com
15. [15]  MSMEs account for 43.3% GDP, 6.21% employment — Acting DG [Internet]. Vanguard; 2022 Jun [cited 2026 Sep 30]. Available from: vanguardngr.com
16. [16]  National Pension Commission. Second Quarter Report 2025 [Internet]. 2025 Dec [cited 2026 Sep 30]. Available from: pencom.gov.ng
17. [17]  PenCom assets hit N29.4trn, adds 90,000 contributors in 2 months [Internet]. Leadership; [cited 2026 Sep 30]. Available from: leadership.ng