STATUTORY DEDUCTIONS IN KENYA

STATUTORY DEDUCTIONS

Introduction:

Statutory deductions are deductions that are effected from employee’s salaries and have been enforced through an Act of parliament. Both employers and employees have no option but comply. These statutory deductions include:

  1. PAYE (pay as you earn)- Income Tax Act Cap 470
  2. NHIF-(National Hospital Insurance Fund) under NHIF Act Cap 255 (and NHIF Act no. 9 of 1998)
  3. NSSF (National Social Security Fund) under NSSF ActCap 258

Employers have to abide with these three Acts by effecting deductions as stipulated and then remit them to the relevant authorities within the required time. The employees on the other hand are to ensure that the right amount is deducted and the records kept up to date.

The employer deducts the three deductions through a check off system. The various bodies i.e. Kenya Revenue Authority (for PAYE), NSSF & NHIF provide employers with guidelines on how to effect the deductions.

VOLUNTARY DEDUCTIONS:

Voluntary deductions are those deductions, which are deducted at the employees will. They emanate from the employee and are not obligated by anyone to have them deducted.

The Employment Act clause 17 (1) (g) provides that an employer can deduct any amount in which the employer has no beneficial interest, whether direct or indirect, and which the employee has requested the employer in writing to deduct from his income.

The total amount of all deductions, which may be made by an employer, shall not exceed 2/3 of an employee’s income. This is notwithstanding the provisions of any other written law and without prejudice to any right of recovery of any debt due. (Employment Act clause 19(3))

Examples of these deductions include cooperative loans, hire purchase and insurance payments. In order to assist the employee as a retention measure, employers do assist the employee in effecting these voluntary deductions. They are deducted through check off system just like PAYE; NSSF and NHIF. The employer receives instructions from the third party e.g. cooperative society and the amounts are deducted and remitted to the third party monthly. Some employers charge a commission (approx. 5% of amount collected on behalf) to the third party organisations for the service.

PAYE ADMINISTRATION

It was introduced in 1966as a way of deducting income tax from gains of employment or services rendered. The employer is the authorised agent of collecting tax.

Section 5 of the income Tax Act sets out the various types of payments or benefits which constitutes taxable profit under PAYE system in Kenya today:

  • Wages –payment in return for work or services mainly made to workers on an hourly, daily, weekly or piecework basis.
  • Fees e.g. professional fees
  • Salaries-a fixed payment made by an employer often monthly for professional or office work
  • Commission
  • Bonus
  • Leave pay
  • Payment in lieu of notice or leave
  • Gratuity
  • Entertainment or other allowances received in respect of employment or services rendered.

The “Pay As You Earn” method of deducting income tax from salaries and wages applies to all income from any office of employment.

Therefore “Pay As You Earn” applies to weekly wages, monthly salaries, annual salaries, bonuses, commissions, directors’ fees (whether the director is resident or non-resident) pensions paid to pensioners who reside in Kenya, where the amount from a registered pensions funds exceeds Kshs.180, 000 per annum, and any other income from an office or employment. (Amount revised 25,000.00)

The system applies all cash emoluments and all credits in respects of emoluments to employees’ accounts with their employers e.g.non cash benefits like telephones, motor vehicles, clubs, furniture, electricity, water etc.

It includes the value of housing where this is supplied by the employer.

It does not include earnings from “casual employment” which means any engagement with any one employer, which is made for a period of less than one month, the emoluments of which are calculated by reference to the period of the engagement or shorter intervals.

Regular part-time employees and regular casual employment where the employees are employed casually but regularly are not considered to be casual employees and PAYE is therefore applicable to them.

EMPLOYER’S DUTY TO DEDUCT INCOME TAX

It is the employer’s statutory duty to deduct income tax from the pay of his employees regardless of whether or not he has specifically been told to do so by the Income Tax Department.

The normal P.A.Y.E. year runs from 1st January to 31st December of every year– it is therefore a calendar year. 

The Kenya Revenue Authority issues a guide (form P7) to employers each year. The purpose of this Guide is to assist employers in the general operation of P.A.Y.E. system and contains any amendments to the PAYE structure.

DEFINITIONS OF TERMS USED

(a) Employer

For “Pay As You Earn” purposes the term “employer” includes:

  • Any person having control of payment of remuneration;
  • Any agent, manager or other representative in Kenya of any employer who is outside Kenya;
  • Any paying officer of Government or other public authority;
  • Any trust or insurance company or other body or person paying pensions

(b)       Employee

This word is defined as inclusive of any holder of an appointment of office, whether public or private for which remuneration is payable.

“Employee” should be read as including, for example, minister, chief, any public servant, company director (resident or non-resident), secretary, and individuals working for any Religious Organization etc.

It includes an employee who retires on pension and stays in Kenya where pension received from a registered pension fund exceed Kshs.25, 000 per month (Kshs.300, 000 per annum).

(The tax free monthly pension or annuity was increased from 15,000 per month (180,000 per annum) toksh 25,000 per month or ksh 300,000 per annum w.ef 1.01.2010)

  1. “ Paying point”

A “Paying point” is the place in which remuneration is paid.

If a non-resident employer calculates remuneration abroad and remits the remuneration direct to the employee then such remuneration should be notified to the Department through the employer’s local representative and P.A.Y.E. tax operated on the remuneration accordingly.  Any cases of doubt should be referred to the Income Tax Office for advice.

  • Monthly Pay

“Monthly pay” includes income in respect of any employment or service rendered, accrued (accumulated) in or derived from Kenya.

This will include:

Wages, salary, leave pay,sick pay, payment in lieu of leave, director’s fees and other fees, overtime, commission, bonus, gratuity or pension whether payable  monthly or at longer or shorter intervals.

Cash allowances, e.g. house or rent allowance, telephone allowance, etc.

The amount of any private expenditure of the employee paid by the employer otherwise than as a loan, , grocery bills, electricity, water, telephone bills.

Non-cash benefits when the aggregate value exceeds Kshs.3, 000 per month.

  • The value of housing, where provided by the employer.

Amounts, which are, simply refund of expenses of employment,

 e.g. subsistence allowance when on duty, mileage allowance for use of employee’s car or for travelling expenses incurred in the course of employment will be excluded.

However subsistence allowance/per Diems paid in cash (flat rates) will be subjected to taxation of amounts in excess of Ksh. 2000 per day.

Such amounts must, however, be shown on any return of wages called for by the Income Tax Office.

Any amount not paid in cash but credited to an employee’s account with the employer is to be treated as paid and tax deducted accordingly.

  1. e) Monthly Personal Relief (MPR)

The amount of Monthly Personal Relief is ksh.  1,162.00Permonth (or ksh. 13,944 per annum) .This relief was applicable form 1st January 2005 and continues in 2008.The monthly personal relief is uniform and is granted to all employees regardless of their marital status.

  1. f) Monthly Payslip

Every employer is required to provide each liable employee on payment of remuneration with a written statement showing:

  • Monthly pay
  • PAYE tax deducted

This formal notification is known as the “monthly payslip” and may be in any form convenient to the employer provided the above information is given.

TAX BRACKETS:

The current tax brackets range from 10%, 15%, 20%, 25% and 30%—– [Ref: COPY OF P38 TABLES]

The employees’ income is deducted tax depending on the bracket it falls in. once all the tax is deducted, the total amount is paid into the employers bank on or before the 10th day of the month following the payroll month provided the tax amounts to at least Ksh. 100.

EXAMPLE OF TAX COMPUTATION

If makau’s Monthly Taxable income for the month is ksh. 45,000. Compute the PAYE payable.

(Assuming all the other reliefs but MPR has been provided for.)

                                                                                    45,000.00

First                10,164.00 taxed at 10%                     = 1,016

Balance:                                                                     34,836

Next                9,576   taxed at 15%                          =1,436

Balance:                                                                     25,260

Next                9,576   taxed at 20%                          =1,915

Balance:                                                                     15,684

Next                9,576   taxed at 25%                          =2,394

Balance:                                                                     6,108

The balance is taxed at 30%           

Hence 6,108 X 30%               =                                  1,832

Total PAYE:                           =                                  8,593

PAYE                                                 =                                  8,593.00

Less MPR                              =                                  1,162.00

PAYE payable                       =                                  7431.00

EXAMPLE 2

Muasya has a monthly taxable income of Ksh. 65,000 per month. Using the P38 Tables, work out the PAYE

Payable . (Assuming all the other reliefs but MPR has been provided for.)

                                                                                    65,000.00

First                10,164.00 taxed at 10%                     = 1,016

Balance:                                                                     54,836

Next                9576    taxed at 15%                          =1,436

Balance:                                                                     45,260

Next                9576    taxed at 20%                          =1,915

Balance:                                                                     35,684

Next                9576    taxed at 25%                          =2,394

Balance:                                                                     26,108

The balance is taxed at 30%           

Hence 26,108 X 30%             =                                  7,832

Total PAYE:                           =                                  14,593

Round off figures to avoid decimals

PAYE                                                 =                                  14,593.00

Less MPR                              =                                  1,162.00

PAYE payable                       =                                  13,431.00

 

EXAMPLE 3

Assuming that, Akeyo gets a monthly income of Ksh 20,000.00. Calculate the PAYE payable using the P38 tables (assume all reliefs except MPR have been provided for)

                                                                                    20,000

First                10,164.00 taxed at 10%                     = 1,016

Balance:                                                                     9,836

Next                9576    taxed at 15%                          =1,436

Balance:                     260      taxed at 20%              =     52.00

Total PAYE:              =                                              2,504.00

Round off figures to avoid decimals

PAYE                                                 =                                  2,504.00

Less MPR                              =                                  1,162.00

PAYE payable                       =                                  1342.00

 

EXAMPLE 4

If my taxable monthly salary amounts to Ksh. 11,135.00, calculate the PAYE.

(Assume all other reliefs have been given except MPR)

                                                                                                11,135

First                10,164.00 taxed at 10%                     =          1,016.40

Balance:                     971.00 taxed at 15%              =             146.00

Total PAYE:                                                              =          1,162.00

PAYE                                                                                     =          1,162.00

Less MPR                                                                  =          1,162.00

PAYE payable                                                           =          00.00

Taxable income (annual rates)

 

Ksh. p.a                                                           Rate:%            Cumulative Tax Payable

 

0          –           121,968                       10                                12,196

121,968           –           236,880                       15                                29,432

236,881           –           351,792                       20                                52,414

351,793           –           466,704                       25                                81,142

466,705                                                           30                                           

 

 

TAX EXEMPTITEMS

  • School fees – when given to employees dependants or relatives is not taxed on the employee provided the employer has been taxed.
  • NSSF contribution and pension deductions if from a registered pension’s scheme. In this case the two deductions are not included when taxing the employee’s salary. I.e. taxation is done after subtracting the two.
  • Insurance relief –was granted with effect from1st January 2007 at 15 % of premiums paid, provided a certificate of premiums paid is availed. This applies to premiums taken in respect of life insurance (for self, spouse or ones child) and the max relief is Ksh. 5,000 per month. The certificate of proof can be for premiums paid by the employee, employer of both. Education policy of at least 10 years maturity qualifies for relief.
  • Home ownership savings plan.- a maximum of Ksh. 4,000 per month (Ksh. 48,000 per annum) is considered as long as it is from a “registered home ownership savings plan” (this is a house to be occupied in future NOT being occupied now). Effective date is 1st January 1999. The institution must be an “approved institution”. Further w.e.f. 1st January 2007 interest earned on deposits not exceeding 3 million shall be exempt from tax. Approved institution means a”bank or financial institution regd under the banking Act. An insurance company (under the insurance Act),or building society (under BS Act)
  • Owner occupied interest –if one is staying in a house bought through mortgage, the interest deducted subject to a maximum of Ksh. 150,000 is tax allowable. This followed amendments to section 35 of the finance Act in 1999. A married woman can also file in their own tax returns an d make claims to this owner occupied allowance. Proof from the lending company in the form of a certificate is needed to confirm interest payable by the employee.
  • Amounts, which are, simply refund of expenses of employment,

E.g. subsistence allowance when on duty, mileage allowance for use of employee’s car or

for travelling expenses incurred in the course of employment will be excluded.

  • Such amounts must, however, be shown on any return of wages called for by the Income Tax Office.
  • Earnings from casual labour-whose rates are paid daily or hourly ( but not regular casuals)

 

HOW TO PAY-IN THE TAX DEDUCTED (Ref p11 form)

  1. The Law requires an employer to pay-in the income tax deducted from his employees’ pay on or before the 10th day of the month following pay-roll month.
  2. Late PA.Y.E. Payments will incur penalty at the rate of 20 per cent of amount paid late as per Section 72D. The Human resource dept. should therefore impress on the Finance Department the need to adhere to this requirement.
  3. Where an employer has no bank account he may pay to any bank but such payments will only be accepted in cash by that bank and a cheque payable to the Paymaster General. (PMG) made by the bank.
  4. Each employer is supplied with a P.A.Y.E. Credit Slip Paying-in Book (Form No.P11).
  5. If the total amount of tax deducted from all employees in any month is less than a hundred shillings or when no tax has been deducted, the employer must complete the relevant portions (“NIL” certificate) of the Original top copy of a Credit Slip and send it direct to his Income Tax Office before the tenth day of the following month.
  6. The remaining two copies should be left in the Paying-in Book.
  7. Where the total amount is less than Ksh.100, it should be carried forward to later months until it exceeds Ksh 100 or untilDecember, whichever is earlier, and then paid-in.
  8. In the case where the PAYE tax deducted exceeds Ksh. 100 the employer should pay the tax deducted in respect of his staff once monthly, to the bank branch in which he maintains an account. The Cheque should be drawn payable to “Paymaster-General, Kenya
  9. All three copies of the credit slip paying in book should be completed in every detail and signed by the employer, using carbon paper.
  10. Bank tellers will stamp all three copies and remove the top two, leaving the last copy in the book as acknowledgement to the employer for his records. Employer’s Personal Identification Number (PIN) must be shown on all the three copies of P11s.

NOTE: Show the following information on the P.11:

  1. i) Employers Name
  2. ii) Current Postal Address
  • Telephone Number
  1. Payroll month or whatever payment is applicable
  2. I.N. (Personal Identification Number).

 

EMPLOYMENT BENEFITS

In accordance with section 5 (2) (b) of the income tax Act where an employee enjoys a benefit, advantage or facility of whatever nature in connection with employment or services rendered; such value should be included in employee’s earnings and charged to tax.

The minimum taxable total value of a benefit, advantage or facility is Ksh. 3,000 per month (up from the previous Ksh 2,000 per month) or Kshs.36, 000 per annum this is with effect from 1st January 2006.

In line with the provisions of the law the commissioner has prescribed rates on the following:

Electricity                                1500 per month

Water                                      500 per month

Furniture                                 1% of cost to employer

Telephone                                30% of bills

 LOW INTEREST RATE EMPLOYMENT BENEFIT/FRINGE BENEFIT

When an employer provides a loan to an employee and charges interest, which is below the prescribed rate of interest, then the difference between the prescribed rate and employer’s loan rate is a benefit from employment and is tax chargeable on the employee.

Low interest rate employment benefit provisions will continue to apply even after the employee has left employment as long as the loan remains un-paid.

However, following amendment to the law by the 1998 Finance Act and introduction of “FRINGE BENEFIT TAX” which is payable by employers, the determination of the chargeable benefits is now in two categories i.e. loans provided on or before 11th June, 1998 and loans provided after 11th June 1998.

(i)         Low Interest Rate Benefit

Employees will continue to be taxed on low interest rate benefit in respect of loans provided by the employer on or before 11th June 1998.

The low interest benefit chargeable on the employees is calculated as the difference between interest charged to the employee and the prescribed rate of interest of 15% per cent, or such interest rate based on the Market Lending Rates prescribed by the Commission’ whichever is lower.

Example 1

–           Loan provided by employer                            –           Ksh.1,500,000

–           Employer’s Loan Interest Rate                                   –           5%

–           Prescribed Rate of Interest (given by KRA)              –           8%

Calculation of Low Interest benefit:

 

–           Low Interest Benefit is (8% – 5% =3%):        KShs.1, 500,000 x 3%

=          KShs.45, 000 per annum

i.e.       KShs.3,750 per month

(ii)        Fringe Benefit Tax Payable by Employer (Section 12B) Effective Date 12th June 1998

A Tax known as Fringe Benefit tax was introduced by new provisions under Section 12B of the Income Tax Act and is payable by employers commencing on the 12th June 1998 in respect of loan provided to employees, directors or their relatives at an interest rate lower than the market interest rate.  The taxable value of Fringe Benefit is determined as follows: –

In case of loans provided after 11th June, 1998 (or loan provided on or before 11th June 1998 whose terms and conditions have changed after 11th June, 1998,) the value of Fringe Benefit shall be the difference between the interest that would have been payable on the loan, if calculated at the market interest rate and the actual interest paid.

Example                    

Date of advance                                              –           12th November 2006

Employer’s loan amount                                 –           KShs.2, 100,000

–           Interest charged to employee              –           5%

–           Market Interest rate for the month     –           8% [refer to market tables]

Calculation of Fringe Benefit Tax:

Fringe Benefit is (8% – 5%= 3%)                    Kshs.2, 100,000 x 3%

= Ksh. 63,000 per annum

Fringe Benefit taxable amount           i.e. KShs.5, 250 per month (for that month)

Fringe Benefit payable by employer Ksh. 5,250 x 30% = 1,575

YEAR 2007:  For the year 2006 the Commissioner published the following prescribed rates of interest for fringe benefits:-

(1)                    January – June –          6%

(2)                    July –December          –           7%

(3)                    1st quarter of 2008       –           7%

NOTES:

 

  • Fringe benefit is taxable at corporate rate of tax of 30% (resident company) of the determined value of benefit. {37.5%-non {resident Company and 20% (listed after Jan 2006) & 27% (listed between Jan 2002 up to December 2005). EPZ enterprises- nil tax for first 10 years next 10 yrs. at 10%.
  • Fringe benefit tax shall be charged on the total taxable value of Fringe benefit each month and the tax is payable on or before the 10th day of the following month to the Pay-Master General in the same way as normal P.A.Y.E. remittance. Employers will therefore pool together all the Fringe benefits for the employees in each month.
  • “Market interest rate” means the average 91 days Treasury Bill rate of interest for the previous quarter.
  • The above provisions will continue to apply even after employees leave employment as long as the loan remains un-paid.
  • Fringe benefit tax is payable even where corporation tax is not due by the employer in question.
  • The provisions of the Act relating to fines, penalties, interest charged, objections and appeals shall apply to the fringe benefit tax.

HOUSING BENEFIT – SECTION 5(3)

Where an employee (or a director is housed,) he should be charged tax at 15% of his total income or the fair market rental value of the premises in that year or the rent paid by the employer, whichever is the higher.

Agricultural Employees are taxed at 10% of his gains or profits from employment subject to employer obtaining prior approval from Income Tax Office

  • If the premises are occupied for part of the year only, the value is 15% of employment income relative to the period of occupation.

Example:

A Manager who earns basic salary of Kshs.30, 000 per month plus other benefits – (e.g. utilities, Servant e.t.c.) – Kshs.15, 000/=  is housed and the employer pays to the Landlord rent of Kshs.20,000 per month (i.e. Shs.240,000 per annum) under an agreement made with the third party.

Calculation housing benefit

Basic Salary                                        –           Kshs.30, 000

Add: Benefits                                     –           Ksh. 15,000

Total                                                   –           Ksh.45, 000

15% of gains of employment therefore-         Kshs.45,000 x 15        =          Kshs.6,750

100

*The actual Rent paid by the employer Kshs.20, 000/= per month is the amount to be brought to charge and not 15% gains of employment. i.etake the higher figure. Take this amount of ksh. 20,000 and add it to the taxable income and compute the tax in the usual manner. In this case the taxable amount is 45,000 + 20,000 = 65,000, work out tax on this amount using the P38 tables.

CAR BENEFIT – SECTION 5(2B)

Where an employee is provided with a motor vehicle by employer, the chargeable benefit for private use shall be the higher of:

  • The fixed monthly rate determined by the Commissioner and the
  • The prescribed rate of benefit.

Prescribed rate

The “prescribed rate of benefit” means the proportion of the initial capital cost of the vehicle for each month as follows: –

Year of purchase                               Rate

  • 1996 –           1% per month of initial cost of the vehicle
  • 1997 –           5% per             “        “            “          “
  • 1998 et seq –           2% per               “        “          “

 

Fixed monthly rate determined by the Commissioner for motor cars

  • Saloon hatch back and estates per month                   per annum

Upto 1200 c.c                                      3,600                           43,200

1201 to 1500 c.c                                  4,200                           50,400

1501 to 1750 c.c                                  5,800                           69,600

1751 to 2000 c.c                                  7,200                           86,400

2001 to 3000 c.c                                  8,600                           103,200

over 3000 .cc.                                      14,400                         172,800

  • Pickups, panel van unconverted

Upto    1750 c.c                                   3,600                           43,200

Over 1750 c.c                                      4,200                           50,400

Landrovers/cruisers                            7,200                           86,400

Range rovers and vehicles of similar nature are classified as saloons.

Example:

Muhimidi who is employed as a financial accountant is provided with a Mitsubishi Pajero car with a rating of 2400 c.c which was bought in July 2001 for Kshs.2, 500,000.Calculate the car benefit.

  • Car benefit is calculated as follows: –

–           2% x Kshs.2, 500,000             =          Kshs.50, 000

–           Commissioner’s fixed monthly rate for a car of 2,500 cc rating        =          KSHS.8,600                            (–refer rates above)

–           The chargeable car benefit is therefore Kshs.50, 000 per month, which is the higher rate. Take this amount of ksh. 50,000 and add it to the taxable income and compute the tax in the usual manner using the P38 tables.

TAX FREE REMUNERATION

There are certain instances when an employer wishes to pay his employees salaries negotiated net of tax.  In such circumstances the employers bears the burden of tax on behalf of such employees. The tax so paid by the employer becomes a benefit chargeable to tax.

PASSAGES

Where an employee receives a cash sum either periodically or in one amount, which he is free to save or spend on whatever passages 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

MEDICAL

Where an employer has a scheme which by practice, provides free medical services to all his employees, the value of such medical services is an a non-taxable benefit of full-time employees.  However, where there is no plan or scheme, the payments made to employees towards medical is a taxable cash payment and must be included in the employees pay for the month of which payment is made and taxed accordingly.

REGISTERED BENEFIT FUND (pension or provident)

An employee’s contribution to any registered fund or contribution fund is now an admissible deduction in arriving at the employee’s taxable pay of the month.  The employee’s deductible contribution is the lesser of:-

  • 30% of pensionable pay.
  • Employee’s actual contribution.
  • 20, 000/- per month.

NOTE

Maximum allowable Pension/Provident Fund contribution was increased from Ksh.17, 500/- per month to Kshs.20, 000/- per month (i.e. Kshs.240, 000/- per annum), effective 1st January 2006.

Tax-exempt withdrawals

From a registered pensions /provident fund

  • Ksh 48,000 for each year of pensionable service subject to maximum of 10 years
  • 1.4 million of a deceased persons withdrawal paid to a dependant

 

NATIONAL SOCIAL SECURITY FUND

10% of monthly income up to a maximum of ksh. 400;half paid by the employer half by the employee.

Contribution made to the National Social Security Fund (NSSF) qualify as a deduction with effect from 1st January 1997. The contributions are compulsory for employers with at least 5 employees.

Where an employee is a member of a pension scheme or provident fund and at the same time the National Social Security Fund (N.S.S.F.) The maximum allowable contributions should not exceed Kshs.20, 000/- per month in aggregate.

EMPLOYERS CONTRIBUTIONS TO REGISTERED OR UNREGISTERED PENSION SCHEME OR PROVIDENT FUND

Contributions paid to unregistered pension scheme or excess (i.e above 20,000 per month) contributions paid to a registered pension scheme, provident fund or individual retirement fund; shall be employment benefit chargeable to tax on the employee.

The amendment is effective from1st July 2004.

HOME OWNERSHIP SAVINGS PLAN

A depositor (employee) shall in any year of income commencing on or after 1st January 1999 be eligible to a deduction up to a maximum of Kshs.4000/- (Four thousand shillings) per month or Kshs.48, 000/- per annum in respect of funds deposited in approved Institution under “Registered Home Ownership Savings Plan”, in the qualifying year and the subsequent nine years of income; provided that:-

Employer has evidence to confirm that the approved Institution with which employee wants         to save is registered by the Commissioner of Income Tax.

Employer will be the one to deduct and remit the amount to the Institution on behalf of the employee.

Employers will attach to form P9A (HOSP) a declaration duly signed by the eligible employee.  The declaration so signed will serve as verification and confirmation by the employer that the employee does not directly or indirectly own interest in a permanent house.  –P9A (HOSP) card is to be used for this purpose.

NOTE

Approved Institution” – Means a Bank or financial institution registered under the Banking Act, an Insurance company licensed under the Insurance Act or Building Society registered under the building Societies Act.”

OWNER OCCUPIED INTEREST – SECTION 15(3) (b)

In ascertaining the total income of a person for a year of income interest paid on amount borrowed from specified financial institution shall be deductible.  The amount must have been borrowed to finance either:–

  • The purchase of premises or
  • Improvement of premises – which he occupies for residential purposes.

The amount of interest allowable under the law must not exceed Kshs.150, 000/- per year (equivalent to Kshs.12, 500/- per month).

 

If any person occupies any premises for residential purposes for part of year of income the deduction shall be reduced accordingly.

On the other hand no person may claim a deduction in respect of more than one residence.  Following amendment to amendment to Section 45 of the Income Tax Act thought the 1999 Finance Act, a married woman can now file her separate return of income and declare income from employment, professional or self-employment income.

In view of this, she has the option to claim for deduction of interest paid provided that the property is registered in her name.

Employer must obtain a signed declaration to the effect that she is the one claiming the deduction to avoid her husband making a similar claim.

Employers will be required to ascertain and allow interest paid on money borrowed to finance owner occupied residential premises under the PAYE system subject to the following conditions:-

  • The employer should allow actual interest paid by eligible employee on production of proof from the lending institution confirming interest payable on the loan for that particular year. The amount of interest to be allowed as ascertained under this condition must not exceed Kshs.12, 500 per month.
  • Where the employee redeems such loan in the course of the year and no interest is subsequently payable such allowable deduction shall cease forthwith upon redemption of loan.
  • The employee shall sign a declaration-indemnifying employer against any false claim in this respect.
  • Employers are expected to review their pay-rolls starting from the month of September and make necessary adjustment to ensure that by the end of the year correct amount of interest have been allowed.
  • The employer shall attach to Form P9A Photostat copy of interest certificate and statement of account from the specified lending institution.

NOTE:           Interest, which has accrued but not paid does not rank as an allowable deduction for this purpose.

PERSONAL RELIEFS

(a)        Monthly Personal Relief – She. 1162/- (with effect from 1st January 2005)

A resident individual with taxable income is entitled to a personal relief of Shs.1162/- per month (i.e. Shs.13, 944/-).  This is a uniform relief and employers are advised to automatically grant personal relief to all employees irrespective of their marital status.

(b)       Insurance Relief with effect from 1st January 2003

A resident individual shall be entitled to insurance relief at the rate of 15% of premiums paid subject to maximum relief amount of Kshs.3,000 per month (or Ksh. 36,000 per annum) if he proves that:-

  • He has premium for an insurance made by him on his life, or the life of his wife or of his child and that the Insurance secures a capital sum, payable in Kenya and in the lawful currently of Kenya: of
  • His employer paid premium for that insurance on the life and for the benefit of the employee which has been charged to tax on the hands of that employee; or
  • 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 qualify for relief.
  • Only premiums paid in respect of an insurance policy taken on or after 1st January 2003 shall qualify for relief.

Notes:

  • Employees must avail to the employer a certificate from insurer showing particulars of the policy e.g. name of insured, type of policy, capital sum payable, maturity date, premiums payable and commencement date of the policy.
  • Employees should review their pay rolls towards the end of the year and make necessary adjustments to ensure that the correct relief had been granted. No relief is available in respect of insurance policy that elapsed in the course of the year.
  • Employer shall attach a copy of the certificate furnished by insurer confirming premiums paid and that the policy was still in force to the employee’s P9A, P9B, P9A (HOSP) Tax deduction Card for that year.
  • For the purposes of insurance relief “child” include a stepchild and an adopted child who was under the age of eighteen year on the date the premium was paid.

Example

Munene who is a cashier with ABCO engineering works has furnished a Life Assurance Policy Certificate showing annual premiums payable of Kshs.48, 000.  The commencement date of the policy is 1st January 2004.

The insurance relief allowable in the payroll from the month of January 2004 will be calculated thus:-

Kshs.48, 000 x 15% = 7,200 per annum i.e. 600 per month . This amount will be deducted before PAYE tax is computed. (It will also be entered in the appropriate column of Tax Deduction Card (P9A).

Example of PAYE computation where benefits and housing is provided          

(i)Mauve is employed as a General Manager at a Basic salary of Kshs.40, 000 per month.  In addition his employer provides him with the following benefits, which add up to ksh. 15,000 per month:

  • Night watchman
  • House Servant
  • Scratch cards
  • Free electricity
  • Free water

The employer has also provided him with a Nissan Saloon car with a rating of 1591 cc and with an initial costing of 500,000 bought in 2004.

The employer has also provided housing – (leased premises – monthly rent Kshs. 20,000).

The PAYE is computed as follows. Korir has further furnished his employer with a certificate of life insurance showing that premiums of Ksh 36,000 per annum have been paid. He also is a contributor to a pension scheme and contributes 10% of his monthly cash income to the fund.                                                                                                                                                                             Ksh

  1. Monthly cash income before pension deductions…………………………….40,000
  2. Deductible pension contributions……………………………………………4,000 [10% x 40,000]
  3. Insurance relief………………………………………………………………….450 [15% x36, 000/12]
  4. Monthly cash income after pension & insurance relief……………..………..….35,550 (1-2&3)
  5. Monthly benefits ……………………………………………………………….. 000

Watchman……………..2,000.00

Electricity………………1,500.00

House servant…………1,500.00

Scratch cards…………10,000.00

Total    15,000.00

  1. Car benefit……………………………………………………………………….10,000

Car benefit at 2% x 500,000 = 10,000

(commissioners determined rate for saloon of 1591 c.c =5800) –hence take the higher rate

  1. Income including benefits…………………………………………………….. 60,550(4+5+6)

 

  1. Housing at 15% x 60,550 = 9,082.50 (charge actual rent paid Shs.20,000)..…20,000.00

(Charge 15% of total income or fair market rate whichever is higher)

  1. Taxable income (7+8)……………………………………………………………….80,550.00
  2. Tax on the monthly income (using P38 tables):

Tax charged on chargeable pay Kshs. 80,550

80,550

*          First Kshs.   10164 at 10% ……………………………………..                   1,016

Balance       70,386

*          Next Kshs.9576 at 15%…………………………………….             1,436

Balance      60,810

*          Next Kshs.9576 at 20%…………………………………….             1,915

Balance    51,237

*          Next Kshs.9576 at 25%…………………………………….             2,394

*          Balance Kshs.41,658 at 30% ………………………………               12,497

*          Total    PAYE……..…………………………………..                     19,258

Less monthly personal relief ………………………………              1162

PAYE to be deducted ………………………………………           18,096

 

The Computation of Benefits are shown on the reverse side of P.9A

 

END OF THE YEAR PROCEDURE

  1. COMPLETION OF P.A.YE. DOCUMENTS

(a)        TAX DEDUCTION CARDS – (P9A, P9A (HOSP) P9B

  1. P9A, P9A (HOSP), P9B

There are three types of tax deductions cards:

(i)         Form P9A

This is a standard format tax deduction card that shows the total amount of tax deducted from an individuals income in respect of a period of one year. All employees whose earnings in cash exceed Ksh.11,135/- per month and who are in receipt of non-cash benefits, valued at Ksh.3000 or more per month in aggregate and all Company Directors, whether receiving benefits or not  are required to have a p9 document that shows the taxes and the relief’s given in a year

(ii)        FORM P9A (HOSP)

This card is used where employee is eligible for a deduction in respect of funds deposited in approved Institution, under “Registered Home Ownership Savings Plan”.  In addition to the conditions for P9A (No, (i) above).

            (iii)       FORM P9B

This card is used in the circumstances where the employer bears the burden of tax on behalf of the

Employee.  In addition to the conditions for P9A (No.(i) above).

At the end of each year employers should fully complete the questionnaire on every tax deduction card showing:-

  1. Dates of commencement and leaving of employment.
  2. Names and address of old/new employer: If known.
  • Details of benefits provided, if any, at the back of the tax deduction cards.
  1. iv) The amounts and details of any pay from which tax was deducted which relates to an earlier period (i.e. previous year(s) e.g. gratuities, Bonuses, Compensation for loss of office e.g. Details of rent paid by employee towards housing

(b)       EMPLOYERS CERTIFICATE – FORM P10

Employers should give details of normal monthly P.A.Y.E. remittances, separately from other payments made at the Pay-Master General relating to tax on lump sum payments, Audit tax, Interest and penalty.  Dates on which the relevant payments were made to the bank must also be shown on the space provided (Appendix 5).

(c)        SUPPORTING LIST – FORM P10A

In addition to giving details of tax deducted for each employee per the tax deduction cards – P9A (HOSP) or P9B, Employers are required to show the tote tax paid in respect of:-

Tax on lump sum payments, Tax determined through P.A.Y.E. Audit, Interest and penalty (Appendix 6).

(d)       FORM P.10B – FRINGE BENEFIT TAX RETURN

Since Fringe Benefit Tax is payable by employer, the details of the fringe benefits and tax paid thereon should not be reflected on the employee’s Tax Deduction Card – P.9A

Employers are therefore required to submit a return to the Department at the end of the year using Form P.10B to show names of the employees, loan amounts, rate of interest charged by employer, taxable fringe benefit values and amount of tax paid.  The fringe benefit tax return – (P.10B) should be submitted by employer together with other P.A.Y.E.  End of year documents.

  1. RETURN OF DOCUMENTS TO INCOME TAX OFFICES ON OR BEFORE 28THFEBRUARY

The following documents which comprise P.A.Y.E. end of year Return should be submitted to the relevant Income Tax Office on or before 28th FEBRUARY

  • Employer’s Certificate – P.10 (2 copies).
  • Supporting list to End of Year Certificate (P.A10 in duplicate).
  • Fringe Benefit Tax Return – (P.10B).
  • Tax deduction cards (9A, P9A (HOSP) P.9b) for the employees whom tax had been deducted from their pay during the year.
  • A list of all the employees who received lump sum payments during the year indicating their full names, gross amount received, relevant years and amount of tax deducted.
  • The Photostat copies of ALL the pay in credit slips (P11s) for the year.
  1. CALCULATION OF BENEFITS ON REVERSE SIDE OF P.9A

The calculation of benefits on the reverse side of each P9A (Tax Deduction Card-Benefit Cases must be completed and signed by the employer at the end of the year.

CERTIFICATE OF PAY AND TAX (P9A, P9A (HOSP) & P9B

Immediately after 31st December each year the employer should prepare a Tax Deduction Card (P9A, P9A (HOSP/P9B for each employee from whose salary P.A.Y.E. tax was deducted at any time during the year.  Certified copies of P9 Forms should be distributed to the employees representing certificate of Pay and Tax for the year.

AUDIT PROCEDURE BY KRA INSPECTORS

The Income Tax Department may send officers to employer’s paying points during the year to check that they are operating the scheme correctly and to give guidance to employers if they are in difficulties.  Any such officer will produce a signed authority.  Employers will be expected to make all records connected with P.A.Y.E. available for inspection.

The audit process will include a check that:

  1. The employer has brought into the payroll all the employee’s emoluments, cash allowances and benefits.
  2. The employer has deducted correct amount of P.A. Y.E. tax.
  3. The tax deducted has all been paid over to the bank.
  4. The pay shown in employer’s salary records has correctly been transferred to the Tax Deduction Card.
  5. The Tax Deduction Card has in all other respects been correctly completed.
(Visited 957 times, 1 visits today)
Share this:

Written by