Gratuity and terminal benefits tax treatment in Nigeria under NTA 2025

An employee is retiring after eighteen years. HR has calculated a gratuity payment, a final salary run, and an unused-leave payout. The question lands on your desk: how much of this is taxable?

Before the Nigeria Tax Act 2025 (NTA), the honest answer was often "it depends on which scheme you're on, and nobody's fully sure." NTA 2025, in force from 1 January 2026, tightens that ambiguity considerably — and the new default is less generous than many employers assumed. Gratuity is now taxable unless it falls inside a specific carve-out. Getting this wrong on a big terminal payout is expensive: either you under-withhold and the Nigeria Revenue Service (NRS) comes back for the shortfall plus penalties, or you over-withhold and short-change someone on their last day.

What actually changed

Under the pre-2026 regime, gratuities paid on retirement or exit were widely treated as tax-exempt in practice, particularly where they were linked to a pension arrangement. NTA 2025 removes that blanket assumption. The Act's default position, confirmed across professional-services summaries of the law (EY, KPMG, PwC), is that gratuity is taxable employment income unless it meets a specific exemption.

The exemption that survives is narrow and specific: pension, gratuity, or any retirement benefit paid in line with the Pension Reform Act 2014 (PRA) remains exempt from income tax. Pension fund assets held under the PRA framework are also exempt.

That single distinction — "is this payment governed by the PRA, or is it a separate contractual gratuity your company pays on top?" — is the whole ballgame for how you tax a terminal benefit in 2026.

Gratuity paid strictly under a Pension Reform Act-compliant scheme: exempt. Gratuity paid as a standalone employer benefit outside the PRA structure: taxable as ordinary employment income.

The two kinds of "gratuity" in Nigerian payroll

This matters because Nigerian employers actually run two different things under the same word:

1. PRA-governed retirement benefits. Since the contributory pension scheme became mandatory in 2014, most employees build a Retirement Savings Account (RSA) with a licensed Pension Fund Administrator (PFA). At retirement, PenCom's rules govern how much of the RSA balance an employee can take as a lump sum versus draw down as a programmed withdrawal or annuity. That lump sum, and the ongoing pension income, sits inside the PRA framework — and stays exempt under NTA 2025.

2. Employer-paid contractual gratuity. Many organisations — especially those with legacy defined-benefit schemes, negotiated executive packages, or exit agreements — pay an additional lump sum on top of the RSA, calculated by formula (commonly a multiple of final salary per year of service). This payment does not flow through a PFA and is not governed by the PRA. Under NTA 2025, this is the gratuity that is now squarely taxable.

If your organisation only runs the standard contributory pension scheme with no separate gratuity policy, this change may not touch you at all — your employees' exit lump sums are already PRA-governed and exempt. If you run a legacy or supplementary gratuity scheme, this is the change that matters.

Compensation for loss of employment: the ₦50 million line

A related but distinct item is compensation paid when an employment relationship ends involuntarily — redundancy payouts, negotiated severance, or damages for wrongful termination. NTA 2025 raised the exemption threshold here from ₦10 million (under the old Personal Income Tax Act) to:

Compensation for loss of employment or injury: exempt up to ₦50,000,000. Any amount above that threshold is taxable.

Worked example: an employee made redundant receives ₦60 million in severance. The first ₦50 million is exempt. The remaining ₦10 million is added to taxable income and subject to PAYE at the employee's applicable marginal rate for that tax year.

This is a separate bucket from gratuity. A retiring employee might receive a PRA-exempt pension lump sum, a taxable contractual gratuity, and — if the exit is also framed as a severance — a compensation payment tested against the ₦50 million threshold. Each needs its own tax treatment; don't collapse them into a single "final pay" line and apply one rule to all of it.

What stays ordinary taxable income, full stop

Not everything on a final payslip is "terminal benefit" in the tax sense. Salary in lieu of notice, encashed unused annual leave, and any 13th-month or bonus payments due on exit are treated as ordinary employment income — no special exemption, taxed through PAYE exactly like a normal month's pay. Only gratuity (subject to the PRA test above) and qualifying loss-of-employment compensation get the special treatment described here.

A worked example: retiring employee, mixed payout

An employee retires with:

• RSA lump sum withdrawal via their PFA under PRA rules: ₦8,000,000 — exempt
• Company gratuity scheme (not PRA-linked), 2.5 months' final salary per year of service, 18 years: ₦9,000,000 — taxable, added to the employee's income for PAYE purposes
• Encashed leave, 15 days: ₦450,000 — taxable, ordinary income

Only the ₦9,000,000 gratuity and the ₦450,000 leave encashment enter the PAYE calculation for that pay period. For how the graduated PAYE bands actually apply to a lump sum like this, see our companion guide on computing PAYE in Nigeria — the exact current brackets should always be confirmed against the Nigeria Revenue Service before you run a large one-off payment, since a lump sum can push someone into a higher marginal band for that period.

What to check before you run a terminal payout

1. Confirm whether the gratuity is paid under a PRA-registered pension arrangement or as a separate employer scheme — this single fact decides the tax treatment.
2. If the payment is framed as compensation for loss of employment, test it against the ₦50 million threshold, not the old ₦10 million figure.
3. Don't apply the exemption to notice pay, leave encashment, or bonuses — these are always ordinary taxable income.
4. When the classification is genuinely unclear (mixed schemes, historical arrangements predating PRA 2014, negotiated exit terms), confirm treatment with the Nigeria Revenue Service or a tax adviser before running the payment — the cost of getting a large lump sum wrong, in either direction, is much higher than the cost of asking first.

Does AnooreHR handle this?

Live today, for Nigeria. AnooreHR's payroll engine runs Nigeria's tax rules — including PAYE, pension, and statutory levies — from a country profile pack, not hardcoded logic, so treatment updates as the law does. Gratuity, severance, and other terminal-benefit earning types can be configured per employer with the correct taxable/exempt flag, and the calculation flows straight into payslips and the general ledger with no re-keying. Our AI assistant can flag an unusually large terminal payment for review and draft the supporting entry — but a human always approves anything that moves money or touches a statutory filing.

Every other country on our roadmap ships as a profile pack on the same engine, not a separate build. If gratuity or severance rules in your market look different, that's the model we're extending to next.

Running a retirement or exit payout in Nigeria and want the classification checked before you pay it? Sign up or book a quick demo.

Related reading: How is PAYE calculated in Nigeria? · Severance and redundancy pay under NTA 2025 · Nigerian pension contribution guide