This month Kenyan employees will get one of the biggest tax reliefs in over a decade as employers implement the new tax measures on Pay As You Earn (PAYE).
While making the proposals, contained in the Tax Laws (Amendment) Bill that MPs passed Wednesday, President Uhuru Kenyatta said the move would put more money in the pockets of Kenyans and cushion them against the negative impact of the coronavirus pandemic. The new tax rates will be applied once the president signs the bill.
Those earning Sh24,000 and below per month are expected to get their salaries untouched by the Kenya Revenue Authority (KRA).
Initially, this tax exemption was only a preserve of those who were earning a monthly salary of about Sh13,486 and below. A significant number of Kenyans will benefit from this measure.
Previously, a salary of Sh24,000 attracted PAYE of Sh1,583. If you earn Sh30,000, you will save about Sh2,000; while those earning Sh40,000 should expect to save about Sh2,400 in taxes.
For those who make Sh50,000, expect your net salary to increase by Sh3,400, while the take-home pay for those making about Sh75,000 will rise by at least Sh4,500.
PERSONAL RELIEF
For those who earn Sh100,000, the new PAYE will allow them to save Sh5,800, while those making between Sh200,000 and Sh300,000 will save between Sh10,000 and Sh15,000 in taxes.
For those who earn half a million shillings, the savings will grow to Sh25,000, while those who earn Sh1 million will save Sh50,000. Those who earn between Sh1 million and Sh3 million will expect savings of between sh50,000 and Sh150,000.
That is not all, the tax relief has also grown by 70 per cent from Sh1,408 to Sh2,400. This means that on top of the drop in PAYE, one will also save an additional Sh2,400 in taxes in personal reliefs.
But these workings will depend on other factors such as the amount one contributes towards insurance and pension as well as mortgages or home ownership plan deductions. Other statutory deductions such as to the National Hospital Insurance Fund (NHIF) will also not attract any taxes.
Under the previous tax regime, taxable income was at graduated rates that ranged from 10 per cent to 30 per cent. The 30 per cent applied to any income above Sh564,709 per annum or Sh47,059 per month.
ENHANCED TAX BANDS
The scrapping of the 30 per cent rate now means that the maximum individual rate of tax will be 25 per cent. The rate will now apply on any income in excess of Sh425,666 or Sh35,472 per month if the taxable bands remain the same.
“The above changes will increase the taxpayer’s disposable income. Previously only income below Sh13,486 was exempt from tax, with the changes effectively doubling the tax-exempt income,” KPMG tax experts note in a report assessing the new tax measures.
“For a person earning a monthly income of Sh40,000, the change will result in additional take-home pay of approximately Sh2,600,” the KPMG report adds.
KPMG notes that being annual rates, these changes will impact the government’s 2020 income. “It will be important to clarify the implications of the change on persons who have paid tax on the first three months under the old rates,” KPMG adds.
BONUSES
The new tax law has also enhanced the tax bands for taxation of withdrawals from NSSF, registered pension funds and provident funds where the withdrawals are in excess of the tax-free amounts.
For instance, the new tax rate for the first Sh288,000 is 10 per cent, up from the previous Sh147,580 per annum.
The new tax law has also reduced the tax rate on surplus funds withdrawn by or refunded to an employer in respect of registered pension or registered provident funds from 30 per cent to 25 per cent.
This change will also result in an increase in disposable income for taxpayers. It will also act as an incentive to save for retirement due to the enhanced post-retirement take-home packages.
But it has brought bad news for those who were enjoying tax-free bonuses. Now bonuses, overtime and retirement benefits, which had initially been exempted through the 2016 Finance Act, will be taxed.
FKE COMPLAINS
This will result in a reduction of disposable income for low-income earners. Previously, employees whose taxable employment income before bonus and overtime allowances did not exceed the lowest tax band would not be subject to PAYE on receipt of bonuses and overtime allowances over and above their basic pay.
The Federation of Kenya Employers (FKE) said it appreciates the measures put in place, but noted that its members were saying they were still not enough.
FKE also noted that the proposed tax reliefs will only benefit low-income and high-income earners but will leave out the bulk of the middle-income population.
“The measures were positive and bold in some areas. We are grateful for the PAYE tax relief for the low-income earners. But this will only benefit the low-income and high-income earners who attract the 30 per cent tax. It has left out quite a lot of people in the middle-income bracket,” FKE chief executive Jacqueline Mugo told the Nation in an earlier interview.