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.


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


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.


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 dependent


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.


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.


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.


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.”


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).


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