Your payslip has several deductions on it. Pension. Maybe NHF. Possibly a health insurance premium. Some of them come off before PAYE is calculated. Others come off after. That distinction matters more than most people realise.
If a deduction is applied before tax, it reduces your chargeable income and therefore reduces your PAYE. You pay less tax. If a deduction is applied after tax, it reduces your take-home but does nothing for your tax bill.
This post explains exactly which contributions reduce your income tax in Nigeria under the NTA 2025, how each one works, how much you can save, and what you need to do to make sure your employer is applying them correctly.
The Quick Answer: All Five Reduce Your Tax
But only if they are applied correctly, in the right order, and with the right documentation.
| # | Contribution | Rate | Base | Tax Deductible? | Cap | Who Manages It |
|---|---|---|---|---|---|---|
| 1 | Pension (employee) | 8% minimum | Pensionable emoluments | Yes | No cap | Your PFA |
| 2 | NHF | 2.5% | Basic salary only | Yes (if enrolled) | No cap | FMBN |
| 3 | NHIS / Health Insurance | Actual premium | N/A (flat premium) | Yes | No cap | HMO / NHIS |
| 4 | Life Insurance | Actual premium | N/A (flat premium) | Yes | No cap | Insurance company |
| 5 | Voluntary Pension (above 8%) | Any amount | Your choice | Yes | No cap | Your PFA |
Every contribution in that table is deductible from your gross income before PAYE is applied. But there are conditions on each one: the right base, the right documentation, and in some cases, the right enrollment status. The rest of this post goes through each one properly.
1. Pension: The Biggest and Most Automatic
This is the one deduction that should already be working for you, even if you have never thought about it.
Under the Pension Reform Act and the NTA 2025, your employer deducts a minimum of 8% of your pensionable emoluments from your salary every month and pays it into your Retirement Savings Account (RSA) with your chosen Pension Fund Administrator (PFA). This happens automatically.
The critical point most people miss is the base. Pension is calculated on pensionable emoluments, not your full gross salary. Pensionable emoluments means basic salary, housing allowance, and transport allowance only.
| Salary Component | Pensionable? (Used for Pension Base) | Taxable in Gross Income? |
|---|---|---|
| Basic salary | Yes | Yes |
| Housing allowance | Yes | Yes |
| Transport allowance | Yes | Yes |
| Utility allowance | No | Yes |
| Meal allowance | No | Yes |
| Leave allowance (up to 10% of basic) | No | Partially exempt |
Why does this matter? Because if your employer calculates pension on your full gross (including utility, meal, and other allowances), the pension deduction will be higher than required. That is actually not the worst thing for the employee since it lowers chargeable income further, but it is not technically correct under the law.
Your employer also contributes 10% of your pensionable emoluments on your behalf. That employer contribution is not deducted from your salary and is not included in your taxable income. It is a separate benefit.
Tax saving: Every naira of pension deducted reduces your chargeable income. For someone with pensionable emoluments of N2,400,000 per year, the 8% pension deduction of N192,000 saves N28,800 in PAYE at the 15% rate.
Action: Confirm on your payslip that pension is being deducted and that the base used is your pensionable emoluments (basic + housing + transport). If you want to save more and reduce your tax further, ask your PFA about increasing your voluntary contribution above 8%.
2. NHF: Small Saving, Big Long-Term Benefit
Most employees either do not know they are enrolled or do not know they can claim it as a deduction.
The National Housing Fund requires employees in certain sectors to contribute 2.5% of their monthly basic salary to the Federal Mortgage Bank of Nigeria (FMBN). This contribution is tax-deductible under the NTA 2025.
Unlike pension, NHF enrollment is not universal. You need to be registered with the FMBN through your employer. Many private sector employees are not enrolled at all. If you are not enrolled, you cannot claim this deduction.
NHF = 2.5% of basic salary monthly. Deductible only if you are registered with the FMBN. Qualifies you for FMBN mortgage products.
Beyond the tax saving, the NHF has a practical long-term benefit: it qualifies you to access FMBN-backed mortgages at significantly below-market interest rates. For anyone planning to buy a home in Nigeria, this is worth considering seriously.
| Factor | Case For Enrolling | Case Against |
|---|---|---|
| Tax saving | 2.5% of basic is deductible, reduces PAYE | Small saving for lower earners |
| Mortgage access | Qualifies you for FMBN mortgages at below-market rates | Only useful if you plan to own a home |
| Refundability | Contributions refundable if you never access a mortgage | Refund process can be slow in practice |
| Cash flow impact | Small monthly deduction (2.5% of basic) | Reduces monthly take-home slightly |
Tax saving: If your basic salary is N150,000/month (N1,800,000/year), your NHF contribution is N3,750/month (N45,000/year). At the 15% band, that saves N6,750 per year in PAYE.
Action: Ask your HR team whether you are enrolled in the NHF. If not, and you want to enroll, request that they register you with the FMBN. Once enrolled, submit a written deduction claim so the NHF contribution is applied before PAYE is calculated.
3. NHIS and Health Insurance: Often Missed on the Pre-Tax Side
Many employees have this deduction but their employer applies it post-tax. That is the wrong order.
Your health insurance premium, whether through the National Health Insurance Scheme (NHIS) or a private Health Management Organisation (HMO), is fully tax-deductible under the NTA 2025. There is no cap.
The catch is that some payroll systems deduct the health insurance premium from net pay (after tax) rather than gross pay (before tax). This is incorrect. The premium should be subtracted from your gross income before PAYE is calculated.
Health Insurance deduction = Actual annual premium. No cap. Must be deducted from gross income BEFORE PAYE is calculated, not from take-home pay after.
If you are unsure which way your employer is handling it, look at your payslip. If the health insurance deduction appears in the same section as pension and NHF (before the PAYE line), it is being applied pre-tax correctly. If it appears after PAYE, it is being applied post-tax and your employer should correct this.
Tax saving: A N60,000 annual health premium saves N9,000 per year at the 15% band. At the 18% band, it saves N10,800.
Action: Check your payslip. Confirm the health premium is deducted before PAYE. If it is not, raise this with HR in writing and reference the NTA 2025 provisions on allowable deductions.
4. Life Insurance: The Most Overlooked Deduction
Almost nobody claims this one. Almost everybody who has a life policy qualifies.
If you pay premiums on a qualifying life assurance policy, the full annual premium is deductible from your chargeable income under the NTA 2025. No cap. This includes term life policies, whole life policies, and many endowment policies.
What makes this the most overlooked deduction is that it is entirely self-initiated. Your employer has no way of knowing you have a life insurance policy unless you tell them. You need to submit a written claim with your policy document and premium receipts before your employer can apply the deduction.
Life Insurance deduction = Actual annual premium. No cap. Self-initiated. Submit policy document and receipts to HR to claim.
Tax saving: A N120,000 annual life insurance premium saves N18,000 per year at the 15% band.
Action: If you have a life insurance policy, submit a written claim to HR immediately. Include a copy of your insurance certificate and most recent premium receipt. If you have been paying premiums without claiming this deduction, you may have been overpaying PAYE for months or years. Check whether a retrospective adjustment or an annual return claim is possible.
5. Voluntary Pension: The Smartest Tax Move Most People Are Not Making
You can save more for retirement and pay less tax at the same time. Very few employees do this.
The mandatory pension contribution is 8% of your pensionable emoluments. But you can contribute more, and any amount above the mandatory 8% is also fully tax-deductible under the NTA 2025. There is no cap.
The way to think about this: if you are in the 15% tax band and you contribute an extra N200,000 voluntarily to your pension, the government effectively pays N30,000 of that for you through the tax saving. Your net cost of saving N200,000 more is N170,000.
Voluntary Pension = Any contribution above the mandatory 8% of pensionable emoluments. Fully deductible. No cap. Contact your PFA to set it up.
Tax saving: An extra N200,000 per year in voluntary pension contributions saves N30,000 in annual PAYE at the 15% band. At the 21% band, the saving is N42,000.
Action: Call or visit your PFA and ask to increase your monthly voluntary contribution. Confirm the new amount with your employer in writing so it is reflected in payroll.
The Combined Tax Saving Across All Four Mandatory/Common Contributions
Here is how pension, NHF, health insurance, and life insurance work together across different salary levels.
| Contribution Type | N1.5m salary (15% band) | N3.6m salary (15/18% band) | N7.2m salary (18% band) | N15m salary (21% band) |
|---|---|---|---|---|
| Pension (8% of N1.5m / N3.6m / N7.2m / N15m) | N18,000/yr | N43,200/yr | N103,680/yr | N252,000/yr |
| NHF (2.5% of basic; basic = 50% of gross approx.) | N2,813/yr | N6,750/yr | N13,500/yr | N28,125/yr |
| NHIS (N60,000 annual premium assumed) | N9,000/yr | N9,000/yr | N10,800/yr | N12,600/yr |
| Life Insurance (N120,000 annual premium assumed) | N18,000/yr | N18,000/yr | N21,600/yr | N25,200/yr |
| Total annual tax saving (all four combined) | N47,813 | N76,950 | N149,580 | N317,925 |
* Pension saving calculated on 8% of full gross for simplicity. NHF calculated on 50% of gross as approximate basic salary. NHIS and life insurance savings at band rates: 15% for N1.5m and N3.6m, 18% for N7.2m, 21% for N15m. Actual savings vary by specific package structure.
The highest earners in this table save over N317,000 per year purely from the tax deductibility of these four contribution types. For a N15,000,000/year earner, that is over N26,000 per month in tax saved through contributions they are likely already making, but may not have been claiming properly.
The One Thing That Undermines All of These
Documentation and written claims.
The NTA 2025 is explicit: deductions must be claimed in writing and supported by verifiable documentation. Your employer is not obligated to apply any deduction unless you have formally requested it with evidence.
For pension, the deduction is usually automatic. For everything else, especially NHF, health insurance, life insurance, and voluntary pension, you need to proactively submit a written claim and attach the relevant documents at the start of each tax year.
If you have never done this, your employer may have been calculating your PAYE on a higher chargeable income than you are entitled to. You can raise this with HR to correct future payroll runs, and if significant amounts are involved, consider filing a corrected annual tax return through your State IRS.
See exactly how much each contribution saves you.
The NairaSeed Tax Calculator lets you enter each deduction individually. Add pension, NHF, health insurance, and life insurance one at a time and see in real time how each one brings down your chargeable income and your monthly PAYE.
>> Calculate your contribution savings here
Related reading on NairaSeed:
- 6 Legal Deductions That Can Reduce Your PAYE Tax in Nigeria Right Now
- Nigeria’s New Rent Relief Deduction: How to Claim Up to N500,000 Off Your Income Tax in 2026
- How to Calculate Your Chargeable Income in Nigeria: Step-by-Step (2026)
- PAYE Tax in Nigeria: A Complete Guide for Employees and Employers (2026)
Disclaimer
All figures in this article are estimates based on the Nigeria Tax Act 2025. Tax savings depend on your income band, specific package structure, and deduction amounts. NHF figures assume basic salary is approximately 50% of gross salary for illustration. This article is for educational purposes only and does not constitute tax or financial advice. Consult a qualified tax professional or your State Internal Revenue Service for personalised guidance.
