Allowances, Overtime and Deductions: Getting Them Right in Payroll

Basic salary is the easy part of payroll. The arguments start with everything around it: the transport allowance someone was promised, overtime from the stock count, a deduction nobody explained. Each of these items needs three things: an agreed rule, an approval and a clear line on the payslip.

Start with a register of pay items

Before you touch a pay run, list every item that can appear on a payslip, and decide how each one behaves.

The tax column follows the general position under the Nigeria Tax Act 2025, as summarised by commentators. Employment income includes salary, wages, allowances, bonuses and benefits. Genuine reimbursements of documented business expenses, with receipts, are generally not taxed. The pension column follows the Pension Reform Act 2014, under which contributions are calculated on basic, housing and transport as a minimum. Whether other allowances are pensionable depends on your scheme, so confirm both columns with your tax adviser and PFA.

Allowances: fix the rule, then batch the changes

Most allowance problems come from one-off changes made directly in the payroll sheet. Someone's transport allowance goes up "from next month", and three months later nobody remembers why.

Two habits prevent this:

1. Every change has an effective date and an approver. "Transport allowance for the Garki office from ₦40,000 to ₦50,000, effective 1 December 2026, approved by Tunde Bakare."
2. Change groups together. When a whole office or grade gets the same allowance, apply it as one batch, not 23 separate edits. One batch means one approval and one audit entry.

Overtime: what the law says, and what it leaves to you

Section 13 of the Labour Act lets normal hours be fixed by agreement, collective bargaining or an industrial wages board. Hours worked beyond those normal hours are overtime. The Act doesn't set a general overtime rate; it leaves the rate to agreement between employer and employee. Some guides quote a statutory 1.5× rate, but we couldn't confirm that in the Act, so put your rate in the employment contract or handbook.

Worked example. Ifeanyi Okeke works in operations at the Ikeja warehouse. His contract says:

• normal hours are 8 a day, Monday to Friday;
• overtime is paid at 1.5× his hourly basic rate;
• the hourly rate is monthly basic ÷ 176 hours.

His basic is ₦150,000 and he worked 10 approved overtime hours during the November stock count.

The overtime is taxable, so it goes into November's PAYE calculation. Our PAYE guide explains how.

Overtime should be approved before it reaches payroll, by the manager who asked for it. A timesheet signed after the fact is a weaker control than an approval logged when the work is agreed.

Penalties and deductions: tread carefully

The Labour Act is strict here. Section 5 says an employer shouldn't make deductions from wages unless the Act or another law expressly allows them. Section 5 also caps total deductions in a month at one-third of that month's wages. Several Nigerian lawyers argue that fines for lateness or misconduct, taken straight from salary, breach section 5.

If your handbook includes penalties:

• take legal advice on whether and how they can be applied;
• get each penalty approved by someone other than the person imposing it;
• show it as its own line on the payslip, with a reason;
• never let penalties and loan repayments together push deductions past the one-third cap.

Voluntary deductions are different. Cooperative contributions or staff loan repayments that the employee has agreed to in writing rest on that written consent.

Check the run before you approve it

Before approving, the reviewer should compare this month's run with last month's and be able to explain every difference: a new allowance batch, overtime from the stock count, a loan that finished. Any movement nobody can explain is the one to hold back.

On the payslip, one line per item

Every item in your register should appear as its own named line. "Allowances: ₦150,000" invites a query. "Housing ₦100,000 · Transport ₦50,000" doesn't. See what a payslip should show for a full sample.

How Flux helps

Flux Payroll keeps each pay item in its own approved record, so payslips show every item on its own line:

• allowances, including allowance batches that apply one change to a whole group;
• overtime and penalties;
• deductions, each with its approval;
• benefits.

Flux calculates PAYE, pension and NHF on each pay run from the items you've set up. Every change sits in the payroll audit trail.