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The short answer
A staff loan agreement records the amount lent, the repayment schedule and the employee's written consent to deductions from pay. The Labour Act, as published, caps total deductions in any month at one-third of that month's wages and limits wage advances to one month's wages, recovered over at least three months without interest. Write the schedule so each monthly repayment sits well inside that cap.
Advance or loan: why the label matters
Small employers in Nigeria lend to staff all the time: school fees in September, rent at renewal, a hospital bill. Most of these arrangements are verbal, and most disputes start when the employee resigns with a balance outstanding and nobody can show what was agreed.
The Labour Act has specific rules on advances of wages. As the Act is published, section 4 limits an advance to one month's wages, requires recovery over not less than three months, and bars interest or discount on the advance. A larger sum lent for a specific need is usually called a staff loan, but whether a court would treat it as an advance under section 4 depends on the facts and the paperwork. Many employers therefore keep staff lending interest-free and spread repayments generously, which keeps them clear of the strictest reading.
The deduction rules to build around
| Rule (Labour Act, as published) | What it means for your agreement |
|---|---|
| s.4: advance not more than one month's wages, recovered over at least three months, no interest | Salary advances stay small and interest-free, with at least three instalments. |
| s.5(7): total deductions in a month not more than one-third of that month's wages | Set each repayment so it, plus any other agreed deductions, stays below one-third. |
| s.5(1): no deductions by way of fines; loss deductions only with a labour officer's prior written consent | Do not add penalties for late repayment to the deduction. |
| s.1: wages paid in legal tender (other methods with prior written consent) | Pay the full wage on record, then show the deduction on the payslip. |
The template
Print two copies; each party keeps one signed original.
- Title
- STAFF LOAN AND SALARY DEDUCTION AGREEMENT
- Parties
- [Business name], RC/BN [number], [address] ("the Employer") and [employee name], [role], staff no. [number] ("the Employee").
- 1. Amount
- The Employer lends the Employee ₦[amount] ("the Loan") for [purpose, e.g. school fees]. The Loan will be paid by transfer to the Employee's salary account on [date].
- 2. Interest
- The Loan is interest-free. No fee or charge is payable.
- 3. Repayment
- The Employee will repay the Loan in [number] equal monthly instalments of ₦[amount], starting with the salary for [month and year]. The schedule is attached as Annex A.
- 4. Consent to deduction
- The Employee consents in writing to the Employer deducting each instalment from salary on the dates in Annex A. The total of all non-statutory deductions in any month will not exceed one-third of that month's wages.
- 5. Early repayment
- The Employee may repay all or part of the balance at any time without charge.
- 6. Leaving employment
- If employment ends for any reason with a balance outstanding, the Employer may deduct from the final salary only within the limit in clause 4. Any remaining balance will be repaid by the Employee at ₦[amount] per month by transfer, starting one month after the last day of work, under a schedule both parties sign.
- 7. Statements
- The Employer will show each deduction on the payslip and give the Employee a statement of the balance on request.
- 8. Whole agreement
- This document and Annex A are the whole agreement on the Loan. Any change must be in writing and signed by both parties.
- Signatures
- For the Employer: name, title, signature, date. Employee: signature, date. Witness: name, address, signature.
Worked example
Example only. A Port Harcourt bakery lends a supervisor ₦300,000 for school fees. Her monthly wage is ₦150,000, so one-third is ₦50,000. The bakery already deducts nothing else beyond tax and pension.
| Option | Monthly deduction | Months | Inside the one-third line? |
|---|---|---|---|
| Repay in 4 months | ₦75,000 | 4 | No: ₦75,000 is above ₦50,000 |
| Repay in 6 months | ₦50,000 | 6 | At the limit, no room for anything else |
| Repay in 10 months | ₦30,000 | 10 | Yes, with ₦20,000 headroom |
The ten-month plan totals 10 × ₦30,000 = ₦300,000. It leaves room if a second agreed deduction appears, and it leaves the supervisor ₦120,000 of her gross wage before tax and pension, which matters more to whether she can keep paying than any clause does.
Running the loan cleanly
- Pay the loan by bank transfer, never cash, so the advance itself is on record.
- Keep a simple loan register: name, amount, date, instalment, balance after each payroll.
- Show the deduction as a separate line on every payslip.
- When the last instalment is taken, give the employee a short note confirming the loan is fully repaid.
- Do not make a new loan to someone whose previous loan is still running unless the combined deductions stay inside the cap.
For the wider picture on what employees face when they borrow against pay, see salary advances in Nigeria, and for setting up payroll deductions generally, running payroll in Nigeria. If you also require staff guarantors, keep the loan separate from the guarantor form: a guarantor who signed for dishonesty has not agreed to cover an ordinary loan.
Where Pryme fits
With a Pryme Business Account, payroll pays wages by transfer and records each run, and the Finance agent can prepare a loan register and flag a deduction that would push an employee past the one-third line before a person approves the payroll.
Questions people ask
How much can I deduct from staff salary for a loan in Nigeria?
The Labour Act, as published, caps total deductions in a month at one-third of that month's wages. Plan the instalment so it and other agreed deductions stay below that.
Can an employer charge interest on a staff loan?
The Labour Act bars interest on advances of wages. For larger staff loans, many employers lend interest-free to avoid the question; take advice before charging interest.
What if the employee resigns before finishing repayment?
Deduct from final pay only within the one-third limit, then agree a written schedule for the balance. If it is not paid, it is a civil debt you can pursue.
Does the employee need to sign anything?
Yes. Get written consent to each deduction in the agreement itself and keep a signed copy. A verbal agreement is hard to prove later.
Sources
- Labour Act full text (theiguides copy) · accessed Oct 2026
- Labour Act, Cap L1 LFN 2004 (PLAC Laws of Nigeria) · accessed Oct 2026
This article is general information, not financial, legal or tax advice. Products described are provided under the terms on this site and are subject to regulation and eligibility.