The cost of payroll non-compliance has increased with administrative penalties of up to 40 per cent under the pay-as-you-earn (PAYE) system, forcing employers to strengthen payroll controls and reporting processes. The higher penalty regime is making payroll errors a material financial risk, particularly for companies that rely on manual or poorly integrated systems.
“The compliance template has been flipped,” Abideen Akande, special adviser to the executive chairman of the Lagos State Internal Revenue Service (LIRS), said at a Deloitte-hosted webinar titled Integrating tax strategy with total rewards philosophy today on Tuesday, January 13, 2026.
He said the cost of non-compliance is now higher than the cost of putting proper systems in place, and that shift is changing employer behaviour.
The Nigerian Tax Administration Act (NTAA) 2025 expands employer liability under the PAYE framework. Section 105 of the Act provides that any person required to deduct, collect or withhold tax, but who fails to do so, is liable to an administrative penalty of 40 percent of the amount not deducted.
Read also: 10 questions to ask your HR about the new PAYE rules
Section 107 further states that where tax is deducted but not remitted by the 21st day of the following month, the employer is liable to pay the outstanding tax, an administrative penalty of 10 percent per annum, and interest at the prevailing Central Bank of Nigeria monetary policy rate.
These provisions significantly raise the cost of payroll errors and late remittances, narrowing the margin for informal practices that previously went undetected.
In 2024, PAYE contributed N705.41 billion to Lagos State’s revenue. In the first quarter of 2025 alone, PAYE collections stood at N243.613 billion, accounting for 73 percent of the state’s total internally generated revenue for the period.
Tax officials say the scale of PAYE collections leaves little room for weak employer controls.
“Payroll and employee reward systems are central to revenue certainty and fairness in the tax system,” Akande said. He said the reforms now place employers at the centre of PAYE compliance rather than treating them as passive collection agents.
The reforms also standardise the treatment of benefits in kind, reducing room for interpretation that previously led to disputes between employers and tax authorities. For instance, the value of employer-provided accommodation is capped at 20 percent of total emoluments, net of rent contributions.
Tax authorities are expanding the use of technology-enabled reporting systems that allow payroll filings to be cross-checked against third-party data, increasing the likelihood that discrepancies will be detected and penalised.
According to Akande, companies with weak payroll controls face a higher risk of sanctions under the new regime, as errors and inconsistencies are easier to identify.
Read also: Over 90% of Nigerians seen exempted from PAYE tax from 2026
For workers, the reforms directly affect take-home pay as employers adjust compensation structures to comply with the new rules. Analysis of 2024 payroll data covering about 1.5 million taxpayers, shared by LIRS, shows that 54.5 percent would pay no personal income tax under the revised framework, while 43.9 percent would pay less. Only about 1.6 percent are expected to pay more.
“When tax considerations are not embedded at the payroll design stage, compliance gaps tend to emerge,” said Joseph Olofinsola, a partner in human capital consulting at Deloitte. He said inconsistent treatment of allowances and benefits remains a common source of PAYE errors, particularly in organisations with fragmented payroll processes.
Olofinsola said the higher penalty regime is pushing companies to review payroll governance and internal controls, with closer coordination between human resources, finance and tax teams. Many firms, he said, are moving toward standardised payroll systems to reduce compliance risk.
Tax specialists say the revised PAYE system is reducing tolerance for informal payroll practices. As penalties rise and enforcement becomes more targeted, companies that fail to strengthen payroll compliance may face higher financial and regulatory exposure.