Contents
- Charging Section.
- Residency Status.
- Employment Benefits.
- PAYE deductions and exemptions.
- Calculation of PAYE.
- Pension.
- SHIF.
- Affordable housing levy.
- NSSF.
- NITA.
Chargeability to tax
Tax is charged based on source and/or residency.
Tax is charged on all income of a person, whether resident or non-resident, which accrues in or is derived from Kenya.
- Non-residents – income paid by a resident employer or permanent establishment of a non-resident employer.
- Resident individuals – Kenya and worldwide employment income.
Residency conditions
- Permanent home and present in Kenya for any period in that year of income, or
- No permanent home, but had:
- 183 or more days, presence in Kenya in that year of income, or
- 122 or more days, presence in that year and each of the two preceding years.
Pay As You Earn (PAYE)
Section 3(1) read together with Section3(2)(ii) of the Income Tax Act provides for the charge to tax on, among other things, gains and profits from employment or services rendered, which accrue or are derived in Kenya.
Section 5 of the ITA provides that gains will be considered as having been accrued or derived if rendered by:
- A resident person in respect of any employment or services rendered by him in Kenya or outside Kenya; or
- A non-resident person in respect of any employment with or services rendered to an employer who is resident in Kenya or the permanent establishment in Kenya of an employer who is not a resident.
Employment Benefits
Gains or profits from employment include;
- Wages, salaries, overtime and leave pay
- Sick pay, commissions, and fees
- Bonus, gratuity or subsistence, traveling, entertainment, fringe benefits, or other allowances; and
- Any other allowance received in the course of employment.
NB: Amounts above are charged on an “earnings” basis and not “receipts” basis
TIP
- Earnings basis – Income is taxed in the period it is earned, regardless of whether it has been received in cash or not. For example, if an employee works in December but receives their salary in January, the income is considered earned in December and taxed in that period.
- Receipts basis – Income is taxed when it is received (e.g., when the cash is in hand or deposited in the bank).
Since the amounts are charged on an earnings basis, it means tax is applied when the income is accrued (earned), not when the payment is made.
- Fringe Benefit Tax
Section 12B Income Tax Act
Payable by employers in respect of loans to employees, directors, or their relatives at an interest rate lower than the market interest rate.
Market Interest Rate means the average 91-day Treasury Bill rate of interest for the previous quarter.
Value of Fringe Benefit = Interest payable on the loan when calculated at the market interest rate less the actual interest paid.
- Fringe benefit is taxable at the corporation rate.
- Charged on the total taxable value of Fringe benefit each month and tax is payable by the 9th day of the following month, same way as normal P.A.Y.E.
- This applies even after an employee has left employment as long as the loan remains unpaid.
- Payable even where corporation tax is not due by the employer in question.
- The applicable market interest rate for the application of fringe benefit tax is 13% for the months of January, February, and March 2025.
- Car Benefit
Chargeable benefit for private use shall be the higher of the rate determined by the Commissioner and the prescribed rate of benefit (2% p.m. of the initial cost of the vehicle)
Where the vehicle is leased or hired from a third party, the benefit will be equal to the cost of hiring or leasing.
- Education Fees for Dependents
Education fees for an employee’s dependents or relatives are taxable if not taxed on the employer,
- Club and Subscriptions Fees
Finance Act 2023 amended ITA by requiring Club entrance and subscription fees to be taxed either under P.A.Y.E or under an employer.
- Meals
A cafeteria established/operated by an employer or a tax-registered third party where the value of meals provided to staff does not exceed KES 5,000 per employee per month is not taxable.
- Benefit in Kind
Benefit in kind if the aggregate cost is below KES 60,000 per annum is not taxable.
- Per Diem/ Reimbursements
For employees working out of their workstation, the first Kes 2,000 per diem is deemed to be reimbursement and not taxable.
Reimbursement expenses are generally not taxable but require to be supported.
“Where the Commissioner is satisfied that subsistence, traveling, entertainment or other allowance represents solely the reimbursement to the recipient of an amount expended by him wholly and exclusively in the production of his income from the employment or services rendered then the calculation of the gains or profits of the recipient shall exclude that allowance or expenditure.”
- Mileage
Amounts received as mileage/transport claims by employees on official duties shall be pegged to the approved rates by the Automobile Association of Kenya (“AA Kenya”).
Any amounts above the approved rates shall be treated as a taxable benefit to the employee.
- Housing Benefit
Non-working directors and whole-time service directors: higher of 15% of gross emoluments, fair market rental value, and rent paid.
Other employees: higher of 15% of gross emoluments or rent paid by the employer under an arms-length agreement with a third party.
Agricultural employees: 10% of the gains or profits from his employment.
Employer Responsibility.
ITA Sec 37. Deductions of tax from emoluments
An employer paying emoluments to an employee shall deduct therefrom, and account for tax thereon, to such extent and in such manner as may be prescribed
If an employer paying emoluments to an employee fails—
to deduct tax thereon; or
to account for tax deducted thereon;
The Commissioner may impose a penalty equal to twenty-five percent of the amount of tax involved or ten thousand shillings whichever is greater.
“employer” includes any resident person responsible for the payment of, or on account of, any emoluments to any employee, and any agent, manager, or other representative so responsible in Kenya on behalf of any non-resident employer
PAYE Deductions & Exemptions.
Tax Reliefs
- Personal relief
Granted to individuals who are residents of Kenya for a year of income- Kes 2,400/month.
An individual is entitled to personal relief from one employer only.
- Insurance relief
Applicable on premiums paid to life, health, or education policies for an individual, spouse, or dependent children.
Education and health policies must have maturity periods of at least 10 years.
The insurance relief is 15% of contributions made but capped at KES 60,000 per annum.
Taxation of Pension.
The first KES 60,000 lump sum withdrawals from both registered pension and provident funds for each year of pensionable service are tax-exempt, subject to a maximum of KES 600,000.
Earnings from non-commuted pensions are exempt up to KES 300,000 per annum.
- The Tax Law Amendment Act, 2024 repealed the retirement age requirement of 65 years for an individual to enjoy the exemption on monthly pension and instead provides for the retirement age to be determined in accordance with the rules of the fund/scheme.
PAYE Tax Bands & Personal Relief
Effective 1st July 2023, Finance Act 2023 had changed the PAYE as follows;
Computation of PAYE
Gross salary less deductions = Taxable Pay;
Subject Taxable Pay to tax based on the PAYE bands = PAYE chargeable/Payable;
PAYE payable less tax reliefs=Payable Due
Social Health Act
The Social Health Insurance Act No. 16 of 2023 was assented to on 19th October 2023 and commenced on 22nd November 2023. The Act repeals the National Health Insurance Fund Act, of 1998.
The Act was passed together with a raft of other health-related laws:
- Primary Healthcare Act – which provides for a framework for the delivery of, access to, and management of primary health care;
- Digital Health Act – which provides a framework for providing digital health services and establishing a digital health information system.
- Facilities Improvement Financing Act – which provides for financing of improvement of public health facilities.
The Social Health Insurance Regulations were gazetted on 8th March 2024. The Regulations operationalize the provisions of the Social Health Insurance Act.
SHA established three funds:
- Primary Healthcare Fund – the objective is to purchase primary healthcare services from health facilities.
- Social Health Insurance Funds –contributions.
- Emergency, Chronic, and Critical Illness Fund – which intends to cover chronic and emergency.
Social Health Insurance Funds (SHIF)
SHIF is at the rate of 2.75% of the gross salary or wage of the household, due by the 9th day of each month.
Penalty for non-compliance- 2% of the amount due for contribution for the period in which the contribution remains unpaid and the total annual contributions, shall apply.
A person shall pay all outstanding contributions and penalties accrued before resuming access to the healthcare services provided under this Act.
SHIF –Employer’s Obligation
- Registration with the Authority. To submit a copy of the Certificate of Registration or Incorporation from the relevant authorized body and a copy of the PIN Certificate of the employer issued by KRA.
- Ensure employees are registered.
- Deduction of the employees’ contribution and remit to the Authority on behalf of the employee by the 9th day of each month; and
- Inform the Authority of any changes in the employment status of its employees. To notify the Authority within 30 days, in case of termination, and remit the final contribution of the employee.
Affordable Housing Levy (AHL)
On 19th March 2024, the president assented to the AHL Act, imposing AHL at the rate of 1.5% of the gross salary or the gross income of a person received or accrued not subject to levy under employment income.
The AHL Act does not give any definition of what gross pay is under the new legislation, neither has KRA issued new guidelines on the same.
The employer is required to match employees’ deductions.
The due date is 9th day of the following month, failure to which a penalty of 3% of the unpaid amount applies. AHL is an allowable deduction under Section 15 of the Income Tax Act.
National Social Security Fund Act
Tier 1: Applies to pensionable earnings up to Kes 7,000 at the rate of 6% i.e. 6%*7,000= 420
Tier 2: Applies to pensionable earnings above Kes 7,000, up to Kes 36,000 at 6%, thus 6%* (36,000-7,000) =1,740
Consequently, the monthly contribution on the lower earnings limit is Kes 420 while the maximum contribution is Kes 1,740 for the upper earnings limit.
The employer is to match the employee’s contributions, thus (420+1,740) *2= 4,320
Effective Feb-2025
Tier 1 – (6%*8000) = 480 Employer to match
Tier 2 – (72000-8000) *6% = 3840, Employer to match
Total = 4320*2= 8,640
NITA
All employers are required to register with the National Industrial Training Authority and remit to the authority a monthly payment of KES 50 per employee including an apprentice, indentured leaner, other trainee, temporary, seasonal and casual worker per year.
