Subscribe to our newsletter

Recieve new articles and resources directly on your inbox. Fill your email below to join our email newsletter today.

Payroll Deductions Guide: Types, Best Practices, & payroll Software

Sheriff Subair

Content Marketing, Pade

February 13, 2024

Get battle-tested HR Insight when you join our bi-weekly newsletter

Managing payroll deductions is crucial for a complete and compliant payroll process

Payroll deductions don’t just impact your employees’ compensation and experience but also your organization’s standing with tax authorities.

Thankfully, we live in a world of automated payroll solutions, sparing HR teams the stress of manually computing deductions for every employee.

Still, many organizations haven’t figured out the right payroll management system to automate this vital task. So we’ll start there. 

Payroll Software For Payroll Deductions

A quick Google search will show you that there are countless payroll systems available on the market. 

Choosing the right software for your organization depends on a couple of factors including your unique use cases and the platform’s capabilities.

Some payroll platforms are suitable for in-house teams. Others are right for small businesses or suited for specific businesses like recruitment agencies.

If you want to know what the top 10 payroll processing platforms in Nigeria are, we wrote a guide on that.

Read More: Best payroll processing systems in Nigeria

Types of Payroll Deductions in Nigeria

Payroll deductions are generally classified into two categories depending on whether they are required or not. The two categories are:

  • Mandatory Payroll Deductions
  • Voluntary Payroll Deductions

Mandatory Payroll Deductions

There are three popular mandatory payroll deductions.

  • PAYE Deductions
  • Pension Deductions
  • Mandatory Deductions

Pay As You Earn (PAYE) Deductions

The Nigerian Personal Income Tax Act requires employers to deduct personal income tax from employee salary as soon as it is paid. This PAYE tax must be remitted on or before the 10th day of the month after which salaries were paid.

The table below shows the taxable income bands and the applicable tax rates on an annual basis.

Note that employees who don’t earn more than the national minimum wage (currently 30,000 Naira) are no longer liable to tax or deduction of monthly PAYE.

Pension Deductions

Employers with at least 15 people are required to participate in a contributory pension scheme with their employees.

The minimum pension contribution is 18% of the employee’s monthly compensation (with a minimum contribution of 10% by the employer and 8% by the employee). If the employer decides to bear all the contributions, the minimum contribution becomes 20% of the monthly salary.

You can automatically remit your employee’s PAYE deductions and pension when you process your payroll on Pade. Request a demo here to see how Pade works.

Organizational Policy

Your organization’s policy could also dictate that some deductions become mandatory.  

For instance, if your organization’s policy stipulates that an employee would pay a fine for coming late 3 times in a month, that deduction will be mandatory and doesn’t require the employee’s approval.

Voluntary contributions

Employees can also choose to have certain amounts deducted from their gross pay. These deductions are not required by law and can be stopped if the employee wills it.

Common examples of voluntary deductions that we’ve seen include:

Retirement Contributions

According to the Pension Reform Act of 2014, employees can make voluntary contributions to their Retirement Saving Accounts (RSA). This is in addition to their mandatory pension contributions.

Employee Stock Options

Stock options are another voluntary deduction. If an employee buys your stock at a fixed price, as the company grows, that person can choose to sell the stock for a profit.

Best Practices for Streamlined Payroll Deductions

A payroll software takes the stress out of managing payroll deductions but you still need to follow certain best practices to ensure that the integrity of your payroll process is protected

Some best practices to take note of include:

Run Periodic Audits And Reviews

Regular payroll audits is a trusted way to protect your organization from financial and regulatory risks.

Payroll audits help ensure that your deductions are accurately calculated and applied according to Nigerian laws and your organization’s policy.

They also contribute to an improved employee experience. Employees do not want to see an unnecessary deduction in their payslips. 1 in 2 employees will start looking for a new job after experiencing just 2 errors in the compensation.

So ensuring accurate payroll deductions through audits helps build trust and confidence among employees.

Stay Informed About Regulatory Changes

Another best practice that will help you understand payroll deductions more is staying informed about regulatory changes.

Yes, it’s true that payroll regulations constantly change. But when it comes to the law, ignorance is not an excuse. 

You must stay abreast of the latest payroll information to protect your organization from financial and reputational risks. The Nigerian Finance Act is a trusted source of information for information concerning payroll in Nigerian organizations.

Transparency And Communication

It is also important that you are in constant communication with your employees. For instance, if you’re performing a payroll audit, let your employees know about it.

Ask them to go through their payslips and come to you with any questions or concerns they might have. You could easily identify problems in your payroll process this way.

Streamline Your Payroll Deductions With Pade

With the right software, computing your payroll deduction becomes the easiest payroll task, regardless of the number of employees you have or the deductions you make.

Pade’s payroll engine allows you to make any number of deductions you need to make before your payroll gets processed. We also make it easy for you to stay compliant with your payroll. You can automatically remit taxes and pension payments and track their progress without having to go to a tax office.

Join organizations like Flutterwave, Mono, and Dantata who automate their payroll process with Pade. Request a demo now.


The best insights delivered straight to your inbox once a month.