Severance and redundancy in Nigeria under NTA 2025

A senior employee is leaving — voluntary, redundancy, or termination. The contract calls for a severance package. Finance wants to know what's tax-free, payroll wants to know what to deduct PAYE on, and the employee wants the gross figure that lands in their account. Under the Nigeria Tax Act 2025, the answer changes meaningfully for any package above ₦10 million.

This guide walks through the new exempt cap, the three categories of exit pay Nigerian employers actually use, the Labour Act procedure for redundancy, and how the math compares across Kenya, Ghana, and South Africa for groups operating Pan-African.

What changed under NTA 2025

For decades, the Personal Income Tax Act (PITA) treated compensation for loss of employment as exempt from tax up to ₦10 million. Anything above that was taxed at the employee's marginal PAYE rate.

The Nigeria Tax Act 2025, effective for periods from 1 January 2026, lifts that cap to ₦50 million. Per KPMG's 2025 Flash Alert on Nigeria's personal income tax reform, the increase is one of the more material employee-side changes in the new regime — alongside the abolition of the Consolidated Relief Allowance and the introduction of the Rent Relief deduction.

Two practical consequences:

• A redundancy package of ₦35 million that would have been partly taxable under PITA is now fully exempt under NTA 2025.
• Packages above ₦50 million are still partly taxable, but the bracket the excess falls into has shifted: the new PAYE bands top out at 25% (vs 24% under Finance Act 2020), with the first ₦800,000 tax-free.

The cap applies on a per-event basis, not annually. An employee who exits twice from the same employer (rare but possible after a re-hire) is entitled to a fresh exemption on each genuine loss-of-employment event.

Three categories of exit pay — and why the distinction matters

Nigerian payroll engines treat exit payments in three buckets:

1. Loss-of-employment compensation. A lump sum paid on involuntary exit — termination without cause, redundancy, or contract non-renewal driven by the employer. Tax-free up to the ₦50m cap. This is the bucket where most exit-pay disputes live.

2. Gratuity from an approved pension scheme. Where the company runs an approved gratuity scheme (separate from the standard pension contribution under the Pension Reform Act 2014 as amended by the Pension Reform Act 2024), gratuity payments enjoy their own exemption track. Per PwC Nigeria's 2024 tax data card, gratuity from an approved scheme is fully exempt regardless of amount — it does not consume the loss-of-employment cap.

3. Redundancy ex-gratia. An additional sum paid alongside the statutory redundancy entitlement, typically as a goodwill or relationship-preservation payment. NTA 2025 treats this as falling within the loss-of-employment cap — it doesn't get its own exemption — but most engines track it on a separate ledger line for audit purposes.

The categorisation matters because the same gross figure can be fully exempt or partly taxable depending on which bucket it lands in. A finance team that lumps everything into "severance" will lose the gratuity exemption in the audit.

Worked example — ₦60m exit package

A senior manager with 12 years' service is being made redundant. The contract specifies:

• Statutory redundancy pay (one month's salary per year of service): ₦24m
• Ex-gratia goodwill payment: ₦6m
• Gratuity from the approved scheme: ₦18m
• Payment in lieu of 3 months' notice: ₦12m

Total gross: ₦60m

The NTA 2025 treatment:

Component	Amount	Treatment
Statutory redundancy	₦24m	Within ₦50m loss-of-employment cap
Ex-gratia	₦6m	Within the same cap
Gratuity (approved scheme)	₦18m	Separately exempt — does not consume cap
Payment in lieu of notice	₦12m	Taxable as employment income
Loss-of-employment subtotal	₦30m	Below ₦50m cap → fully exempt
Taxable subtotal	₦12m	PAYE on payment in lieu of notice

Payment in lieu of notice (PILON) trips up most exit calculations. It is not loss-of-employment compensation in the eyes of the tax authority — it is contractual salary the employee would have earned during the notice period, paid up front. PAYE applies in full, calculated at the employee's effective rate for the relevant period.

The gratuity treatment is also where finance teams most often leave money on the table for the employee. If the company runs an approved gratuity scheme, the ₦18m exits the calculation entirely and the employee's net is materially higher.

The Labour Act redundancy procedure

Section 20 of the Labour Act sets out the procedure an employer must follow for redundancy. Three pillars, none of them optional:

1. Inform the trade union (or, in non-unionised workplaces, the workers' representative) of the reasons for and extent of the anticipated redundancy.
2. Apply the principle of "last in, first out" in selecting employees for redundancy, subject to all factors of relative merit including skill, ability and reliability.
3. Negotiate redundancy payments with the trade union or representative, in any case where the employer is contemplating a redundancy.

Per Global Legal Insights' 2025 Nigeria employment guide, the National Industrial Court has consistently treated the Section 20 procedure as a substantive — not merely procedural — protection. An employer who pays a generous redundancy package but skips the consultation step is still vulnerable to a wrongful-termination claim.

The "last in, first out" principle is also more rigid than many employers assume. Recent NICN rulings have set aside redundancies where the employer selected a long-tenured employee while retaining a shorter-tenured one in the same role, without contemporaneous documentation of why "factors of relative merit" justified the deviation. The documentation needs to exist before the selection is announced, not after the dispute is filed.

For senior managers and professionals — who, like in our leave-entitlements analysis, fall outside the Labour Act's "worker" definition — Section 20 does not directly apply. But contracts and the doctrine of unfair labour practice mean the practical protections often look similar at the NICN.

Notice period and pay in lieu — the four-band table

Section 11 of the Labour Act sets the statutory minimum notice periods, the same four bands that apply to terminations:

Continuous service	Minimum notice
Under 3 months	1 day
3 months to under 2 years	1 week
2 years to under 5 years	2 weeks
5 years or more	1 month

Most senior contracts extend these to 1–3 months. PILON is permitted in lieu of giving notice, but as the worked example showed, PILON is fully taxable. The exit cap covers genuine loss-of-employment compensation — not contractual earnings the employer is choosing to pay up front.

Per The Mediterranean Practice's 2025 redundancy guide for Nigerian employers, engagements where notice and severance are blended into a single round number frequently get re-characterised at the NICN. The court will look at what the contract actually entitled the employee to and apply tax treatment accordingly. A clean line between PILON (taxable) and loss-of-employment compensation (exempt up to cap) protects both employer and employee.

NICN rulings 2023–2026 — what's been tested

Three threads run through recent NICN exit-pay decisions:

Thread one — package taxation. Where employers withheld PAYE on the full severance figure (treating it as fully taxable), employees have successfully claimed refunds for the portion that fell within the loss-of-employment cap. The court has held the employer responsible for over-withholding even where the error was "in good faith".

Thread two — gratuity scheme proof. Where a company describes a payment as "gratuity" but cannot produce documentation of an approved scheme, the NICN has applied loss-of-employment treatment instead. The exemption is conditional on the scheme being on file and operating consistently before the exit event.

Thread three — Section 20 substance over form. Redundancies where the employer paid generously but did not consult or document the selection have been re-characterised as wrongful terminations. The remedy in those cases is typically reinstatement or extended damages — both of which exceed what a properly-handled redundancy would have cost.

Per Banwo & Ighodalo's 2024 employment update, the practical takeaway for Nigerian employers is that the procedure — selection criteria documented, consultation held, gratuity scheme on file — drives outcomes more than the amount.

Pan-African comparison — the same exit, different math

Groups operating across multiple African jurisdictions face genuinely different rules from one country to the next.

Kenya — Section 40(1) of the Employment Act 2007 sets out redundancy procedure. Statutory severance is 15 days' pay per completed year of service, plus one month's notice or pay in lieu, plus accrued leave at the gross rate. There is no specific tax exemption for severance — it is taxable as employment income subject to PAYE, with the option of "spread" assessment over up to five preceding years to mitigate bracket-creep.

Ghana — The Labour Act 2003 (Act 651) provides a redundancy framework but does not prescribe a fixed formula. Per African Legal Information Institute's 2024 commentary, redundancy pay is negotiable, with court-supervised settlements typically landing at one to three months' pay per year of service depending on industry and tenure. Tax treatment follows the standard PAYE schedule.

South Africa — Section 41 of the Basic Conditions of Employment Act sets statutory severance at one week's pay per completed year of service for retrenchments under Section 189 of the Labour Relations Act. The first R550,000 is tax-free under the SARS retirement fund lump sum tax tables (lifetime cumulative across all retirement and severance lump sums), with the balance taxed at 18%/27%/36% in the higher brackets — the SARS tax directive (IRP3(a)) is required before payout.

The headline reading: Nigeria's ₦50m exempt cap under NTA 2025 is now among the most generous in Africa for higher-paid exits, but the process is heavier — the Section 20 procedure is more prescriptive than its Kenyan or Ghanaian equivalents, and the documentation burden falls on the employer.

For a group running payroll across three or four jurisdictions, the practical implication is that exit packages should be calculated per-country at the source, not at group level. A group-level "redundancy template" is a recipe for disputes; a country-aware engine that applies the correct cap, formula, and notice rule is what scales.

Building a defensible exit process

The pieces that protect both sides at the NICN:

• Approved gratuity scheme on file — documented, consistently operated, and attached to every gratuity payment in the audit trail.
• A redundancy procedure document that codifies the Section 20 steps: who decides, who is consulted, how "last in, first out" is applied, what "factors of relative merit" mean in your context.
• Selection memos written before announcements — contemporaneous documentation of why each individual was selected, signed off by the relevant manager.
• Clean separation of PILON and loss-of-employment compensation in the exit letter and the payslip — the tax treatment differs and the audit needs to show it.
• A leaver checklist covering accrued leave cash-out, unused sick days, pension contributions, and statutory notifications (NSITF, ITF, pension administrator).
• Year-end audit of accrued exit liabilities — most companies under-accrue for redundancy because they don't expect it. A 1–2% provision against payroll for at-risk roles is the industry baseline.

Nigerian employers tend to over-engineer the amount of severance and under-engineer the process. NTA 2025's higher cap reduces the tax exposure but does not change that calculus. The NICN remains the venue where exit disputes are decided, and procedure remains the variable that determines outcomes there.

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AnooreHR runs the full exit workflow: a draft severance calculation per leaver, three configurable severance types (loss-of-employment, approved-scheme gratuity, redundancy ex-gratia), automatic application of the NTA 2025 ₦50m cap, PILON taxed correctly on the payslip, and a complete audit trail from selection memo to final payment. Pan-African groups get country-aware exit math out of the box — Kenya, Ghana, and South Africa included. See a walkthrough or start your free trial.