The Kenya Revenue Authority (KRA) has announced sweeping changes to the computation of Pay-As-You-Earn (PAYE) tax, bringing much-needed clarity and relief to Kenyan employees.
The changes, which take effect on December 27, 2024, align with the Tax Laws (Amendment) Act, 2024, recently signed into law by President William Ruto.
Key Changes to PAYE Computation:
Deductible Contributions: The Affordable Housing Levy, Social Health Insurance Fund (SHIF), and post-retirement medical funds will now be deductible from taxable income.
Tax Relief Adjustments: Updates have been made to applicable tax reliefs for employees, while others have been eliminated.
Employment Gains and Profits: Enhanced clarity on taxable employment benefits and exclusions.
These amendments aim to provide Kenyan employees with increased take-home pay by making certain contributions tax-deductible. The adjustments also aim to align with broader economic goals, such as affordable housing and improved healthcare coverage.
Notable Changes and Implications:
Taxable Income Adjustments:
Contributions to the Affordable Housing Levy, SHIF, and post-retirement medical funds (capped at Ksh15,000 per month) will be deductible from taxable income.
Mortgage interest on loans from specific financial institutions, up to Ksh360,000 annually (Ksh30,000 monthly), is deductible when used to purchase or improve a residential property.
Contributions to registered pension or provident funds, up to Ksh360,000 annually (Ksh30,000 monthly), remain deductible.
Ceased Tax Reliefs:
Affordable Housing Relief
Post-Retirement Medical Fund Relief
Exclusions from Employment Gains and Profits:
The first Ksh60,000 annually (Ksh5,000 monthly) on meals provided by employers.
Up to Ksh360,000 annually paid by an employer into a registered retirement pension scheme as gratuity or similar payments.
Effective Date Dilemma:
The changes, effective December 27, 2024, have left financial professionals debating whether they apply retroactively to the entire month of December or only from the effective date. This uncertainty comes as many businesses prepare to close for the festive season, adding complexity to payroll processing.
Payroll Before December 27: Employees may receive salaries earlier but with higher tax deductions.
Payroll After December 27: Employees may take home higher pay but face delays, potentially impacting Christmas budgeting.
Employers are encouraged to consult their accountants to determine the most suitable approach for payroll processing during this transitional period.
Preparing for 2025 and Beyond:
From January 2025, employees will benefit from higher take-home pay due to the deductions from taxable income. However, financial prudence will be essential to navigate the January “dry spell” following the festive season.
Employee Guidance:
KRA urges employees to review their tax obligations to understand how these changes will affect their net income. Employers and taxpayers are encouraged to familiarize themselves with the amendments and seek clarification as needed to ensure smooth implementation.
These reforms promise to bring a positive shift in the taxation landscape for Kenyan employees, easing their financial burden and improving their quality of life.
