Taxing a severance payment in Nigeria
How compensation for loss of employment is taxed in Nigeria at the time of writing, the 10% withholding in the LIRS table, and paying it through payroll.
By Achekam · · 4 min read · For Running a business businesses in Nigeria
Letting someone go is hard enough without getting the tax on their final payment wrong. A severance package often includes ordinary items, such as salary to the last day and leave pay, alongside a lump sum for the loss of the job itself. Those pieces are not taxed the same way, and the rules for the lump sum changed with Nigeria's 2025 tax laws.
This article sets out how compensation for loss of employment is treated at the time of writing, according to PwC and the Lagos Internal Revenue Service, how it shows on the employer's annual return, and how to put the payment through Achekam's payroll carefully, given that the payroll has no separate final-settlement run.
Only the part above N50 million is a chargeable gain
PwC says that for termination benefits, described as compensation for loss of office, only the amount exceeding NGN 50 million is a chargeable gain, up from the former NGN 10 million threshold. PwC's summary was last reviewed on 29 May 2026 and is consistent with section 50 of the gazetted Nigeria Tax Act and the LIRS FAQ.
Compare the lump sum in your package against that threshold before deciding anything else. The higher threshold is a significant change from the old regime, so check any template or rule of thumb your business inherited from before 2026; it may be working from the old figure.
PwC summarises how personal income, including termination benefits, is taxed in Nigeria on its personal income tax page.
The 10% withholding in the LIRS table
The LIRS withholding tax rate table sets 10% on compensation for loss of employment paid to resident or non-resident non-corporate recipients, and the rate does not apply to corporate recipients. The same table sets 15% on directors' fees paid to resident non-corporate recipients and 20% to non-resident ones. The LIRS document is undated and states no legal basis, though the LIRS FAQ table links the compensation row to section 50 of the Nigeria Tax Act 2025.
How the 10% withholding and the N50 million threshold fit together for a particular payment, and whether withholding applies to the whole lump sum or only part of it, is a question to settle with your adviser before you pay. Do not guess: a payment made without the right deduction leaves the business liable for tax it did not withhold.
If the departing person is a director who is also paid fees, separate the fees from any compensation; the table treats them differently.
Splitting the package before you pay
Write the package out in its parts before anyone touches payroll:
| Part of the package | Usual treatment to confirm with your adviser |
|---|---|
| Salary to the last working day | Ordinary pay, through PAYE |
| Pay for untaken leave | Ordinary pay, through PAYE |
| Notice pay | Confirm treatment |
| Compensation for loss of employment | The section 50 threshold and the LIRS withholding row |
| Reimbursements owed | Not pay; repaid against receipts |
A clean split makes every later step easier: the payslip, the withholding remittance and the annual return.
Showing the payment on the annual employer return
Under the Nigeria Tax Administration Act, 2025, an employer must file a return with the relevant tax authority for all emoluments paid to its employees not later than 31st January each year. It covers every employee employed in the preceding year and shows, for each, the gross emoluments, total deductions, net emoluments and tax deducted.
A person who left mid-year still appears on that return. Ask your adviser how the compensation element should be reflected on it, and keep the working that supports the figures.
Paying it through Achekam's payroll
Achekam has no separate bonus, correction or final-settlement pay run; these go in as variable inputs on the regular run. Pay runs can be monthly, fortnightly or weekly, with each period's overtime, commission, allowances, reimbursements and unpaid leave entered as variable inputs.
So the departing employee's final payment goes into the regular run for their last period. Two cautions follow:
- The calculation follows the inputs. Achekam's payroll is not described as treating compensation for loss of employment differently from other pay. Agree with your adviser how the compensation element should be entered so that the tax worked out on it is right, and check the figures line by line before approval.
- Approval is final. A pay run is approved by someone other than the person who prepared it, nobody can approve a run that pays themselves, and an approved run is never recalculated. Get the final payment right before approval, because there is no going back to adjust it inside the run.
If the departing person is the one who usually approves payroll, someone else must approve their final run. Plan for that in advance in a small team.
Paperwork for the departing employee
Give the employee, in writing:
- a statement splitting the package into its parts;
- the final payslip, showing what was paid and deducted;
- confirmation of any withholding tax deducted from the compensation, with the remittance reference once paid;
- confirmation of their last working day and of any leave paid out.
Keep copies with the termination letter and the adviser's note on the tax treatment.
For temporary staff and final settlements in recruitment businesses, see final settlements for temporary staff. The other payroll steps that still need a person are listed in Nigerian and Kenyan payroll gaps.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
