Ever wondered where a chunk of your salary goes in Kenya? Look no further than PAYE deductions. This article cuts through the jargon and explains how PAYE works, using a real-life example to illustrate.Below is a table illustration of one Taji Mzuri’s payslip.
Breakdown of Taji Mzuri’s Payslip
| Description | Amount (Ksh) |
|---|---|
| Basic Salary | 180,000 |
| NSSF Contribution | – 2,160 |
| Taxable Pay | 177,840 |
| Income Tax | – 48,135.36 |
| Insurance Relief | 255 |
| AHL Relief | 405 |
| PAYE | – 45,075.36 |
| Net Pay | 132,764.64 |
| NHIF Contribution | – 1,700 |
| Housing Levy | – 2,700 |
| Final Net Pay | 128,364.64 |
PAYE Explained: Your Employer Collects Tax at the Source
We begin with PAYE, a system where your employer acts as a tax collector. They withhold a portion of your salary before handing you your net pay. This simplifies tax collection for the government and ensures a steady flow of tax revenue.
Let’s Break Down Taji Mzuri’s Payslip
Take Taji Mzuri, for instance. His payslip shows a basic salary of Ksh 180,000. This is the total amount he earns before any deductions are applied.
Subtracting NSSF Contribution to Find Taxable Pay
The first deduction is the National Social Security Fund (NSSF) contribution, a mandatory savings scheme for future benefits (Ksh 2,160). Subtracting this from Taji’s basic pay gives us his taxable income (Ksh 177,840).
Calculating Income Tax Based on Tax Brackets
Now comes the income tax. This is calculated based on Kenya Revenue Authority (KRA) tax brackets applied to Taji’s taxable income (Ksh 48,135.36).
Reducing Tax Burden with Reliefs and Allowances
There’s a silver lining! Taji can claim reliefs and allowances that reduce his tax burden. These include:
- Insurance Relief: This lowers his tax bill if he has private medical insurance (Ksh -255).
- AHL Relief: This relief, likely not applicable to Taji, stands for Armed Forces Housing Allowance Relief (Ksh -405).
- Personal Relief: Every taxpayer receives a fixed tax-free amount (Ksh -2,400).
By applying these reliefs, Taji’s actual PAYE amount reduces to Ksh 45,075.36. This is the final income tax remitted to the KRA on his behalf.
Net Pay After All Deductions
We need to calculate the net pay by subtracting ALL deductions from the basic salary, not just PAYE.After subtracting all deductions from his basic salary, Taji receives his net pay:
- Net Pay = Basic Salary – NSSF – PAYE – NHIF – Housing Levy
- Net Pay = Ksh 180,000 – Ksh 2,160 – Ksh 45,075.36 – Ksh 1,700 – Ksh 2,700
- Net Pay = Ksh 128,364.64