Understanding how PAYE (Pay As You Earn) works in Kenya is crucial for both employers and employees. This guide explains the key aspects of PAYE calculations, deductions and filing procedures.
PAYE is a system where employers withhold income tax from your salary and remit it to the Kenya Revenue Authority (KRA) on your behalf. This ensures a steady flow of tax revenue for the government throughout the year.
Taxable Employment Income
- Cash Payments: All your salary components, including wages, salary, bonuses, allowances, commissions, and overtime pay, are considered taxable income.
- Non-Cash Benefits: Benefits exceeding Ksh 3,000 per month, such as car benefits, employer-provided housing, or loans with interest rates lower than the market rate, are also taxable.
- Mileage Reimbursement: Any reimbursement exceeding the AA Kenya rates for work-related mileage becomes taxable income (effective July 1st, 2023).
- Club Fees: Entrance and subscription fees paid by the employer on your behalf are taxable if considered a business expense for the employer.
- Applies to Residents and Non-Residents: Everyone earning employment income in Kenya is subject to PAYE, regardless of residency status.
Employer Responsibilities
- PAYE Registration: Any person paying employee emoluments (salary and benefits) must register for PAYE.
- Tax Withholding: Employers are required to deduct tax from employee salaries based on the prevailing tax tables.
- Tax Remittance: The deducted tax must be remitted to KRA by the 9th day of the following month.
- PAYE Return Filing: Employers must file a PAYE return with KRA detailing the tax deducted from each employee.
Taxable Income Calculation
- Gross Salary: This is your total salary before any deductions.
- Non-Taxable Benefits: Subtract the value of any non-taxable benefits (explained below) from your gross salary.
- Tax Brackets: Kenya uses a tiered tax system with varying rates ranging from 10% to 35% (as of July 2023). Your taxable income falls under different brackets with corresponding tax rates.
- Allowable Deductions:You can deduct certain expenses from your taxable income to reduce your tax liability:
- Mortgage Interest: Up to a maximum of Ksh 300,000 per year for interest paid on a mortgage for your primary residence.
- Pension Contributions: Up to Ksh 20,000 per month contributed to a registered pension scheme.
- Tax Reliefs:These further reduce your taxable income:
- Personal Relief: Currently Ksh 2,400 per month for residents.
- Tax Reliefs: Allowances for insurance premiums, post-retirement medical fund contributions (introduced in 2024).
Tax Payable
Apply the relevant tax rate from the bracket your remaining taxable income falls under to calculate the final tax amount.
|
Monthly Pay Bands (Ksh.) |
Annual Pay Bands (Ksh.) |
Rate of Tax (%) |
|
On the first Kshs. 24,000 |
On the first Kshs. 288,000 |
10 |
|
On the next Kshs. 8,333 |
On the next Kshs. 100,000 |
25 |
|
On the next Kshs. 467,667 |
On the next Kshs. 5,612,000 |
30 |
|
On the next Kshs. 300,000 |
On the next Kshs. 3,600,00 |
32.5 |
|
On all income above Kshs. 800,000 |
On all income above Kshs. 9,600,000 |
35 |
|
Personal Tax Relief |
||
|
KShs. 2,400.00 |
KShs. 28,800.00 |
|
Example:
Let’s say your gross monthly salary is Ksh 100,000, and you contribute Ksh 10,000 to a registered pension scheme.
- Taxable Income = Ksh 100,000 – Ksh 10,000 (pension contribution) = Ksh 90,000
According to the tax brackets (refer to the table in the original article), the first Ksh 24,000 falls under the 10% bracket. The remaining Ksh 66,000 falls under the 25% bracket.
- Tax = (Ksh 24,000 x 10%) + (Ksh 66,000 x 25%) = Ksh 2,400 + Ksh 16,500 = Ksh 18,900
Remember: This is a simplified example. Your specific situation might involve other deductions and reliefs.
Non-Taxable Benefits under PAYE
- Meals provided by the employer (up to Ksh 4,000 per month)
- Night allowances (up to Ksh 2,000 per day)
- Medical cover provided by the employer
- Employer contributions to registered pension schemes (within limits)
Affordable Housing Levy
Both employers and employees contribute 1.5% of the employee’s gross monthly salary towards the Affordable Housing Levy. This contribution is remitted to KRA within 9 working days after the end of the month.
PAYE Return Filing Process
- Compile a list of employees and submit it via a PAYE Return on iTax.
- If no PAYE is due, submit a nil return.
- Log in to iTax, select “File Return,” and upload the completed return form.
- Receive an acknowledgment receipt upon successful filing.
PAYE Payment Procedure
- Log in to iTax and select Payment Registration.
- Choose Income Tax as the tax head and PAYE as the tax subhead.
- Select the tax period and payment type.
- Download the payment slip generated by the system.
- Make payment via bank, M-PESA, or debit/credit card.
Penalties for Non-Compliance
- Late filing incurs a penalty of the higher of 25% of the tax due or KShs. 10,000.
- Late payment attracts a penalty of 5% of the tax due and 1% interest per month on unpaid tax.
- Failure to deduct and account for tax incurs a penalty of 25% of the tax involved or KShs. 10,000, whichever is higher.
Understanding how PAYE is calculated and complying with tax regulations is essential for both employers and employees to avoid penalties and contribute responsibly to Kenya’s tax revenue.