Have you ever stared at your payslip, wondering where a chunk of your hard-earned money goes? In Kenya, like many countries, the government collects income tax through a system called PAYE. This means your employer deducts a portion of your salary before you even see it. Let’s embark on a journey to understand how PAYE works and where your deductions go, using James Gichanga, a Kenyan pilot, as an example. Here’s a table breakdown of James’ payslip with a basic pay of Ksh. 120000.
| Deduction | Amount (KES) | Description |
|---|---|---|
| Basic Salary | 120,000 | James’s gross monthly pay |
| NSSF Contribution | 2,160 | This goes towards James’s retirement savings |
| Taxable Pay | 117,840 (Basic Salary – NSSF) | The amount used to calculate income tax |
| Income Tax | 30,135.36 | The tax owed based on James’s taxable income |
| Insurance Relief | -255 | Reduces taxable income for private medical insurance (if applicable) |
| AHL Relief | -270 | Lowers taxable income for contributions to an Approved Housing Scheme (if applicable) |
| Personal Relief | -2,400 | Standard deduction provided to all taxpayers |
| PAYE (Pay As You Earn) | 27,210.36 (Income Tax – Reliefs) | The actual income tax James pays monthly |
| PAY After Tax | 90,629.64 (Basic Salary – NSSF – PAYE) | The amount James receives after income tax deductions |
| NHIF Contribution | 1,700 | This contributes to James’s medical insurance |
| Housing Levy | 1,800 | This goes towards a national housing fund |
| Net Pay | 87,129.64 (PAY After Tax – NHIF – Housing Levy) | The final amount James takes home each month |
Step 1: The Starting Point – Gross Pay
James’s adventure begins with his gross pay of KES 120,000. This represents his total earnings before any deductions.
Step 2: Mandatory Deductions – Shaping the Taxable Pay
Before calculating income tax, some mandatory deductions are made:
- NSSF Contribution (KES 2,160): This contributes to James’s retirement savings, ensuring a secure future after he hangs up his pilot’s cap.
Step 3: Calculating Taxable Pay – The Tax Base
James’s taxable pay is KES 117,840 (Basic Salary – NSSF Contribution). This is the amount used to determine his income tax liability.
Step 4: Facing the Taxman – Income Tax Calculation
Based on his taxable income, James owes KES 30,135.36 in income tax. However, there’s a ray of sunshine!
Step 5: Reliefs to the Rescue – Reducing Tax Burden
The government offers reliefs to ease the tax burden on its citizens. These reliefs can include:
- Insurance Relief (KES -255): If James has private medical insurance, this amount reduces his taxable income, lowering his tax liability.
- AHL Relief (KES -270): Contributing to an Approved Housing Scheme can also decrease James’s taxable income and ultimately, his tax amount.
- Personal Relief (KES -2,400): This is a standard deduction provided to all taxpayers.
Step 6: PAYE Defined – The Actual Tax Deducted
By applying these reliefs (Insurance Relief + AHL Relief + Personal Relief) to his income tax, James’s actual monthly PAYE amount comes down to KES 27,210.36.
Step 7: Approaching the Finish Line – PAY After Tax
Now, let’s calculate James’s pay after income tax deductions (PAY After Tax). This is KES 90,629.64 (Basic Salary – NSSF Contribution – PAYE). This represents the amount he receives after the initial tax bite.
Step 8: Final Deductions – Reaching the Net Pay
But wait, there’s more! Before James pockets his paycheck, there are two final deductions:
- NHIF Contribution (KES 1,700): This contributes to James’s medical insurance, ensuring access to healthcare.
- Housing Levy (KES 1,800): This goes towards a national housing fund, contributing to the development of the housing sector.
Step 9: The Final Destination – Net Pay
Finally, James arrives at his net pay of KES 87,129.64 (PAY After Tax – NHIF Contribution – Housing Levy). This is the amount he takes home each month.