Lilian Mwende, a dedicated software engineer in Kenya, receives a monthly basic salary of Ksh 130,000. But the amount she actually takes home, known as her net pay, is significantly less. This difference arises because a portion of her salary goes towards mandatory deductions, primarily for Pay As You Earn (PAYE) taxes and social security contributions. Let’s embark on a journey through Lilian’s payslip to demystify how PAYE functions in Kenya.
Breaking Down the Payslip: Earnings vs. Deductions
Before diving deeper, let’s first examine the breakdown of Lilian’s earnings and deductions on her payslip (refer to Table 1).
Table 1: Breakdown of Lilian Mwende’s Payslip
| Category | Description | Amount (Ksh) |
|---|---|---|
| Earnings | Basic Pay | 130,000.00 |
| Deductions | ||
| * Social Security | NSSF Contribution | 2,160.00 |
| * Income Tax | ||
| – Taxable Pay | (Basic Pay) – NSSF | 127,840.00 |
| – Income Tax | Calculated on Taxable Pay | 33,135.36 |
| – Reliefs | Reduce Income Tax | – (255.00 + 292.50 + 2,400.00) |
| – PAYE | Income Tax After Reliefs | 30,187.86 |
| * Other Deductions | ||
| – NHIF Contribution | Health Insurance | 1,700.00 |
| – Housing Levy | Affordable Housing Initiative | 1,950.00 |
| Net Pay | Take-Home Pay | 94,002.14 |
Unveiling the Deductions: A Closer Look
Now, let’s shed light on the different deductions on Lilian’s payslip:
- Securing the Future: Social Security Contribution
A mandatory contribution goes towards the NSSF, ensuring Lilian’s financial well-being upon retirement.
- Calculating Income Tax: A Step-by-Step Breakdown
- Establishing Taxable Pay: First, Lilian’s taxable income is determined by subtracting the NSSF contribution from her basic pay. This amount forms the base for calculating her income tax.
- Income Tax Calculation: KRA uses established income tax bands to calculate the income tax amount.
- Reliefs Reduce the Burden: Thankfully, Lilian qualifies for specific reliefs that lessen her overall tax burden, resulting in a lower final tax amount to pay (PAYE).
- Additional Deductions Explained
- Ensuring Healthcare Access: NHIF Contribution
- Supporting Development: Housing Levy
Reaching Net Pay: The Final Figure
After subtracting all mandatory deductions from her basic salary, we arrive at Lilian’s net pay, the amount she actually receives in hand.
Key Takeaways in Focus
Understanding PAYE deductions empowers employees like Lilian to grasp how a portion of their salary contributes to taxes and social security programs. The figures used in this example are based on the current PAYE rates and reliefs in Kenya (as of June 2024). Remember, these are subject to change based on government regulations.