- What is PAYE?
- What are the income tax bands for the current year 2020
- What is NHIF?
- What is NSSF?
- How is housing allowance/benefit taxed?
- How is car allowances/benefits taxed?
- What is tax free remuneration?
- How is medical services and medical insurance benefits deducted?
- Are passages non-taxable benefits?
- What is a defined benefit fund or defined contribution fund?
- What are allowed tax exemptions?
- What is personal tax relief?
- How is monthly PAYE tax deducted?
- What is included in a monthly pay slip?
- What are tax deduction cards (P9)?
- Who is liable for PAYE?
- How is PAYE remitted to the KRA?
- What is the end of the month procedure for PAYE submissions to the KRA?
- What is the end of the year procedure for PAYE submissions?
Q. What is PAYE?
PAYE applies to all form employments and its a method of deducting income tax from salaries and wages applies to all income from any office or employment. It applies to weekly wages, monthly salaries, annual salaries, bonuses, commissions and directors fees and housing. PAYE tax does include income from casual employment which means any engagement with any one employer which is made for a period of less than one month. PAYE deduction from any form employment can be calculated using the KRA PAYE calculator. It's an employer's statutory duty to deduct PAYE from the pay of his employees throughout the financial year. Common terms in PAYE regulations
- An employer defines: any person having control of payment of remuneration, any paying officer of government or other public authority and any trust or insurance company or other body or person paying pensions
- An employee defines any inclusive holder of an appointment of office, whether public or private, for which remuneration is payable. It also applies an employee who retires on pension and stays in Kenya where pensions received from a registered pension fund exceed KSh 25,000 per month and up to KSh 300,000 per annum.
- A paying point is the place at which remuneration is paid.
- Monthly pay includes income in respect of any employment or service rendered, accrued in or derived from Kenya. This includes: salary, cash allowances, leave pay, sick pay, fees overtime, commission, bonus, gratuity, pension and any private expenditure of the employee paid by the employer including rent, loans, bills.
Q. What are the income tax bands for the current year 2020
The current income tax bands and personal relief rate came into effect on 1st January 2018
|Taxable income||Tax Rate|
|Taxable income||Tax Rate|
|KSh0 - KSh147,580||10%|
|KSh147,581 - KSh286,623||15%|
|KSh286,624 - KSh425,666||20%|
|KSh425,667 - KSh564,709||25%|
|KSh564,710 and Above||30%|
|Personal Relief||KSh 16,896 p/a|
Q. What is NHIF?
NHIF provides medical insurance cover and is open to all individuals who have attained the age of 18 years and have a monthly income of more than Ksh 1,000 and below contribution rates are based on an individual's gross income.
|KSh 5,999||KSh 150|
|KSh 6,000 – 7,999||KSh 300|
|KSh 8,000 – 11,999||KSh 400|
|KSh 12,000 – 14,999||KSh 500|
|KSh 15,000 – 19,999||KSh 600|
|KSh 20,000 – 24,999||KSh 750|
|KSh 25,000 – 29,999||KSh 850|
|KSh 30,000 – 34,999||KSh 900|
|KSh 35,000 – 39,999||KSh 950|
|KSh 40,000 – 44,999||KSh 1,000|
|KSh 45,000 – 49,999||KSh 1,100|
|KSh 50,000 – 59,999||KSh 1,200|
|KSh 60,000 – 69,999||KSh 1,300|
|KSh 70,000 – 79,999||KSh 1,400|
|KSh 80,000 – 89,999||KSh 1,500|
|KSh 90,000 – 99,999||KSh 1,600|
|KSh 100,000 & Above||KSh 1,700|
Q. What is NSSF?
The National Social Security Fund (NSSF) core mandate is to provide basic financial security benefits to Kenyans upon retirement in the both the formal and informal sectors of the economy. NSSF pension contribution are based on an individual's gross income, the Upper Earning Limit (UEL) is KSh 18,000 while the Lower Earnings Limit (LEL) is KSh 6,000. The pension contribution is 12% of the pensionable wages made up of two equal portions of 6% from the employee and 6% from the employer subject to an upper limit of KSh 2,160 for employees earning above KSh 18,000. The employee contribution shall be drawn directly from his salary and wages while the employers contribution shall come directly from the employer. The contributions relating to the earnings below the LEL of the earnings (a maximum of KSh 720) is credited to Tier I account while the balance of the contribution for earnings between the LEL and the UEL (up to a maximum of KSh 1,440) is credited to Tier II account.
Q. How is housing allowance taxed?
a. The housing benefit for a director and a whole time ser vice director shall be the higher of 15% of total income (or employment income, in case of whole time ser vice director), the fair market rental value and the actual rent paid by the employer.
b. Agricultural Employee (Including a whole time ser vice director) who is required by terms of employment to reside on a plantation or farm:
a. 10% of his gains or profits from employment minus any rent charged to the employee. This is subject to employer obtaining prior approval from Domestic Taxes Office. (see also reduced rates of benefits for agricultural employees - Appendix 5).
i. Agricultural employee shall not include a director other than a whole-time ser vice director.
c. Any other Employee
The taxable value shall be the higher of an amount equal to 15% of the gains or profits from employment or ser vices rendered, excluding the value of those premises, or the rent paid by the employer if paid under an agreement made at arm’s length with a third party: Provided that:
i. If employer pays rent under an agreement not made at arm’s length with a third party, the value of quar ters shall be; the fair market rental value of the premises in that year or rent paid by the employer; whichever is higher, or
ii. Where the premises are owned by employer; the fair market rental value of the premises in that year is to be taken.
N/B: i.In calculating the housing benefits employer is required to deduct rental charges recovered from the employee or director. The amount remaining is the chargeable value to be included in the total taxable pay.
- If the premises are occupied for par t of the year only, the value is 15% of employment income relative to the period of occupation less any rental charges paid by employee/director. (Chargeable value shall be reduced by rent paid by an employee).
- Any employer who provides other than normal housing to an employee should consult his local Domestic Taxes office for advice regarding the value of such housing.
James who earns basic salary of KSh 30,000 per month plus other benefits: Motor Car, House Servants etc. - KSh 15,000/= is housed and the employer pays to the Landlord rent of KSh 20,000 per month (i.e. KSh 240,000 per annum) under an agreement made at arm’s length with the third party. Calculation value of quarters:
|Basic Salary||KSh 30,000|
|Add Benefits||KSh 15,000|
|15% Value of Quarters (KSh 45,000 x 15%)||KSh 6,750|
Q. How is car allowances taxed?
Where an employee is provided with a motor vehicle by employer, the chargeable benefit for private use shall be the higher of the rate determined by the Commissioner and the prescribed rate of benefit. Where such vehicle is hired or leased from third party, employees shall be deemed to have received a benefit in that year of income, equal to the cost of hiring or leasing. The “prescribed rate of benefit” means the following rates for each month on the initial cost of the vehicle:
a. 1996 = 1% per month of initial cost of the vehicle
b. 1997 = 1.5% per month
c. 1998 = 2% per month
Example Wairimu is employed as a Financial Controller is provided with a car - Mitsubishi Pajero (cc rating 2400) which was bought in July 2016 for KSh 2,500,000.
Car benefit is calculated as follows:
i. 2% x KSh 2,500,000 = KSh 50,000 per month
ii. Commissioner’s fixed monthly rate cc. rating 2,400 = KSh 8,600
iii. The chargeable car benefit is therefore KSh 50,000 per month.
N/B Where an employer has restricted use of the motor vehicle, the Commissioner if satisfied of that fact, shall determine a lower rate of the benefit depending on the usage of the motor vehicle.
Q.What is tax free remuneration?
There are certain instances when an employer wishes to pay his employees’ salaries negotiated net of tax. In such circumstances the employer bears the burden of tax on behalf of such employees. The tax so paid by the employer for the employee becomes a benefit chargeable to tax.
Q.How is medical services and medical insurance benefits deducted?
Where an employer provides its employees and their beneficiaries with free medical services or free medical insurance, the value of such medical service or insurance is not a taxable benefit on the employee.
Q. Are passages non-taxable benefits?
When an employer himself pays for or reimburses the cost of tickets for passages, including leave passages for his employee and family, the value of the passages is a non- taxable benefit of the employee if the employee is recruited outside Kenya and is in Kenya solely for the purpose of serving his employer and he is not a citizen. Where, however, such employee receives a cash sum either periodically or in one amount which he is free to save or spend as he chooses or for any other purposes and for the expenditure of which he does not have to account to the employer, the amount received is a taxable cash allowance. Passages paid for by the employer in circumstances other than that in italic above are a taxable benefit on the employee.
Q.What is a defined benefit fund or defined contribution fund?
Employees contributions to registered contribution funds like NSSF are admissible as tax deduction. The maximum allowable pension fund contribution is KSh 20,000 per month and upto KSh 240,000 per year. Contributions made by individual to a retirement fund are also applicable if the contributions are 30% of the income or upto Ksh20,000 per month. However, contributions paid by a non-taxable employer to unregistered pension scheme or excess contributions paid to a registered fund or individual retirement fund; shall be employment benefit chargeable to tax on the employee.
Q.What are allowed tax exemptions?
- Persons living with disabilities Persons living with disabilities with a valid exemption certificate are exempted from income tax on their taxable income of KSh 150,000 per month and upto KSh 1,800,000 per year. Persons living with disabilities can calculate their allowed disability relief using the paye tax calculator.
- Income tax exemption of bonuses, overtime allowance & retirement benefits Bonuses, overtime allowance and retirement benefits are tax exempt where they are paid to an employee whose gross salary before the bonus and overtime allowance does not exceed KSh11,180 per month as from July, 2016.
Q.What is personal tax relief?
- Personal relief All individuals with taxable income are entitled to a personal relief of KSh1,408 per month and upto KSh16,896 per year as from January 2018. Employers are advised to automatically grant personal relief to all employees irrespective of their status. Employee's personal relief can computed using the income tax calculator.
- Insurance Relief All individuals with a valid insurance certificate are entitled to insurance relief at the rate of 15% of premiums paid subject to maximum relief amount of KSh 5,000 per month and up to KSh 60,000 per year if he proves that:
- he has paid premium for an insurance made by him on his life, or family members: wife, child and that the Insurance secures a capital sum, payable in Kenya.
- his employer paid premium for that insurance on the life and for the benefit of the employee which has been charged to tax on that employee.
- both employee and employer have paid premiums for the insurance: Provided that:
- No relief shall be granted in respect of part of premium for an insurance which secures a benefit which may be withdrawn at any time at the option of the insured.
- Premiums paid for an education policy with a maturity period of at least 10 years shall qualif y for relief.
- Only premiums paid in respect of an insurance policy taken on or after January 2003 shall qualify for relief.
George Kimani has furnished a Life Assurance Policy Certificate showing annual premiums payable of KSh 48,000. The insurance relief allowable in the payroll from the month of January will be calculated:
Insurance Relief: 48,000 x 15% = 7,200 per year and 600 per month. Employee's insurance relief can computed using the advanced pay-as-you-earn calculator
Q.How is monthly PAYE tax deducted?
To arrive at monthly tax to be deducted:
- charge income tax on chargeable monthly pay per monthly tax tables.
- deduct from income tax charged monthly personal reliefs.
|Income Tax Bracket||Rate||PAYE|
|First KSh 11,180||10%||1,118|
|Next KSh 10,534||15%||1,580|
|Next KSh 10,534||20%||2,106|
|Next KSh 10,534||25%||2,633|
|Balance KSh 7,218||30%||2,165|
Q.What is included in a monthly pay slip?
Every month upon renumeration an employer should provide a written statement indicating:
- Total Monthly Pay
- PAYE Deduction
- Other Deductions: NHIF, NSSF Contributions
Q. What are tax deduction cards (P9)?
A P9 form is prepared by employer for every employee liable to income tax. It provides a detailed record of employee's gross pay, benefits, chargeable income, personal relief and income tax PAYE deducted throughout the calendar year. Types of P9 forms:
- Form P9A: Applicable for all employees whose earnings exceeds the minimum wage of Kshs.12,260/= per month and are in receipt of non-cash benefits, valued at KSh 3,000 or more per month which together with cash pay.
- Form P9A (HOSP):Applicable for employees is eligible for a deduction for registered home ownership savings plan.
- Form P9B: Applicable for employees, where the employer bears the burden of tax on behalf of the employee.
- List of Employees of whom the employer has deducted income tax from, together with the respective amount of tax as recorded in payslip.
- List of errors on tax deduction card from previously issued original returns.
- List of objections by employees who weren't satisfied that the amount of tax deducted by his employer is correct
- Issuance of certificate of pay i.e. P9A, P9A (HOSP) or P9B After 31st December each year the employer should prepare and issue income tax deduction card i.e. P9A, P9A(HOSP) or P9B for each employee.
Q.Who is liable for PAYE?
Any individual whose gross pay plus benefits including housing provided by employer exceeds Kshs.12,260/- per month is liable to PAYE. However, if employer is aware that the employee has income from main employment elsewhere, then PAYE should be deducted even though the earnings are less than Shs.12,260/- per month.
Q.How is PAYE remitted to the KRA?
The Law requires an employer to pay-in the PAYE. tax deducted from his employees’ pay before the 10th day of the month following pay-roll month. Failure and/or late PAYE payments will incur penalty at the rate of 25 per cent of amount paid late as per Section 37(2) of the Income Tax Act and interest at 1% per month per as per Section 38(1) of the Tax Procedures Act, 2015. If an employer finds that he is unable to make his monthly payments by the due date - i.e. before the 10th day of the month following the month of deduction - for reasons of remoteness, he should make full representations setting out all the relevant facts to the appropriate Domestic Taxes Office. Employers are required to make payments of tax recovered from Lump Sum amounts, tax established through PAYE. adjustments, penalty or interest imposed for PAYE. offences to the Commissioner of Domestic Taxes using Payment Registration Number (PRN).
N/B: Penalties and Interest:
a)PAYE offences - Section 37(2)
The Commissioner may impose a penalty under Section 37 (2) of the Income Tax Act if an employer fails:
i. to deduct tax upon payment of emoluments to an employee
ii. to account for tax deducted
iii. to supply the Commissioner with a cer tificate prescribe under PAYE Rules.
The penalty is at the rate of 25% of the amount of tax involved or KSh 10,000, whichever is greater.
b)Interest on unpaid tax - section 38 (1) of the tax procedures act, 2015
A late payment interest of 1% per month or part thereof shall be charged on amount of PAYE tax remaining unpaid for more than one month after the due date until the full amount is paid.
An employer may lodge an objection against imposition of a penalty and any other decision taken by the Commissioner within 30 days of being notified of the penalty or the decision. If the employer is aggrieved by the Commissioner’s decision on the objection, he may appeal to the Tax Appeals Tribunal within 30 days of being notified of that decision.
Q.What is the end of the month procedure for PAYE submissions to the KRA?
Employers are required to provide the following: