In Kenya, salaried employees contribute to the tax system through a program called PAYE. This means employers withhold a portion of your income and remit it directly to the KRA on your behalf. Let’s break down the different components of PAYE deductions using the example of Isaac Joseph, who earns a basic salary of Ksh 150,000.
Dissecting Isaac’s Salary:
| Description | Amount (Ksh) |
|---|---|
| Basic Pay | 150,000.00 |
| NSSF Contribution | -2,160.00 |
| Taxable Pay | 147,840.00 |
| Income Tax | -39,135.36 |
| – Insurance Relief | 255.00 |
| – A.H.L Relief | -337.50 |
| – Personal Relief | -2,400.00 |
| PAYE | -36,142.86 |
| Net Pay Before NHIF & Housing Levy | 111,697.14 |
| NHIF Contribution | -1,700.00 |
| Housing Levy | -2,250.00 |
| Net Pay | 107,747.14 |
Unpacking the Deductions on Your Payslip
Understanding your payslip can be like deciphering a code. Let’s break down each deduction, step-by-step, so you can see where your hard-earned money goes:
1. NSSF Contribution: Securing Your Retirement
First, a portion of your salary goes towards the National Social Security Fund (NSSF). This mandatory contribution helps ensure you have a secure retirement. The good news is that your employer also contributes a matching amount to your NSSF account.
2. Taxable Pay: Arriving at Your Taxable Income
Next, we subtract the NSSF contribution from your basic salary. This amount is called your taxable pay and forms the base for calculating your income tax.
3. Income Tax: Understanding the Tax Brackets
The Kenya Revenue Authority (KRA) uses tiered tax bands to determine your income tax. These bands range from 10% to 35%, according to the Finance Act 2023. Isaac’s income tax is calculated based on the bracket he falls under.
4. Reliefs to Reduce Your Tax Burden: Lowering Your Tax Obligation
Fortunately, the Kenyan government offers various reliefs to lessen your tax bill. These include:
- Insurance Relief: This reduces your taxable income by the amount you contribute to NHIF (National Hospital Insurance Fund).
- A.H.L Relief: This provides tax relief for your contributions towards the Affordable Housing Levy.
- Personal Relief: Everyone receives a fixed tax-free amount under this relief.
5. Calculating Your PAYE: Determining Your Tax Withholding
After applying these reliefs, your employer withholds the actual tax amount, known as your PAYE (Pay As You Earn). Remember, PAYE rates can change based on current tax laws.
6. Net Pay Before NHIF & Housing Levy: Your Salary After PAYE Deductions
This represents your salary after all PAYE deductions have been withheld.
7. NHIF & Housing Levy: Additional Statutory Deductions
There are two additional mandatory deductions on your payslip:
- NHIF (National Hospital Insurance Fund): This monthly contribution provides you with health insurance benefits.
- Housing Levy: This is a new levy that funds affordable housing initiatives. Similar to NSSF, employers contribute a matching amount to this levy as well.
8. Reaching Your Net Pay: Your Final Take-Home Salary
Finally, after subtracting NHIF and Housing Levy contributions from your net pay before these deductions, you arrive at your final take-home salary. This is the amount that gets deposited into your bank account.
Isaac’s Example in Action: Putting the Pieces Together
Now that we’ve explored each deduction, let’s see how they impact Isaac’s salary in practice.
- Basic Salary: Ksh 150,000.00
- NSSF Contribution: – Ksh 2,160.00
- Taxable Pay: Ksh 147,840.00
After applying the tax reliefs (Insurance Relief, A.H.L Relief, and Personal Relief), Isaac’s PAYE amount is calculated.
- PAYE: – Ksh 36,142.86
This leaves him with net pay before NHIF and Housing Levy deductions:
- Net Pay Before NHIF & Housing Levy: Ksh 111,697.14
Finally, subtracting NHIF and Housing Levy contributions gives Isaac his final take-home salary:
- NHIF Contribution: – Ksh 1,700.00
- Housing Levy: – Ksh 2,250.00
- Net Pay: Ksh 107,747.14
As you can see, various deductions are taken from Isaac’s salary throughout the process. Understanding these deductions helps you interpret your payslip and see how much tax you contribute.