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

CategoryDescriptionAmount (Ksh)
EarningsBasic Pay130,000.00
* Social SecurityNSSF Contribution2,160.00
* Income Tax
– Taxable Pay(Basic Pay) – NSSF127,840.00
– Income TaxCalculated on Taxable Pay33,135.36
– ReliefsReduce Income Tax– (255.00 + 292.50 + 2,400.00)
– PAYEIncome Tax After Reliefs30,187.86
* Other Deductions
– NHIF ContributionHealth Insurance1,700.00
– Housing LevyAffordable Housing Initiative1,950.00
Net PayTake-Home Pay94,002.14

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
    A mandatory contribution goes towards the NHIF, guaranteeing Lilian access to healthcare services.
    • Supporting Development: Housing Levy
    Introduced in 2024, this levy supports initiatives promoting affordable housing.

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.