In Kenya, there are several statutory payments and deductions that employers are required to make on behalf of their employees. These payments and deductions are mandated by various laws and regulations and are aimed at ensuring social security, healthcare, and other benefits for employees. These deductions are mandated by statute or law and that’s why they are called statutory payments. The law requires employers to withhold these deductions from employee paychecks. While you can opt out of voluntary deductions, such as a contribution to a retirement account or a flexible spending account, you can’t decline to participate in statutory deductions. Statutory deductions guarantee you pay what you owe, whether you want to or not.

The Finance Act 2023

The Finance Act of 2023, implemented by the Kenyan government, serves to regulate various aspects of the country’s financial system, particularly concerning statutory tax payment. This act introduces several changes and modifications to existing tax laws with the goal of improving revenue collection and fostering economic growth. The Act received Presidential assent on the 26 of June 2023 but most of the amendments will come into place from July 1st 2023.

Key Amendments in the Finance Act

1. Exemption from Income Tax (Effective 1st July 2023): Investment income from a PRMF (Post-Retirement Medical Fund) will be exempt from income tax, regardless of whether the fund is part of a retirement benefits scheme. This move is expected to encourage the adoption of PRMF policies.

2. Post-Retirement Medical Fund (PRMF) Relief (Effective 1st January 2024): Resident individuals contributing to a post-retirement medical fund will be entitled to a relief equivalent to the lower of 15% of the contribution or KShs. 60,000 per annum, starting from 1st January 2024.

3. Reduced Income Tax Rate for a Permanent Establishment (PE) (Effective 1st January 2024): Non-resident companies with a Permanent Establishment in Kenya will see their income tax rate reduced from the current 37.5% to 30%. This amendment aims to attract non-resident businesses to operate in Kenya and promote foreign direct investment.

4. Turnover Tax (Effective 1st July 2023): The Act revises the threshold for TOT from KShs. 1 million – 50 million to KShs. 1 million – 25 million and increases the TOT rate from 1% to 3%. Consequently, SMEs with income above KShs. 25 million, currently registered under the TOT regime, will now be required to pay tax at the corporate rate of 30% on taxable profits. Additionally, taxpayers eligible for TOT will also be subject to the 3% tax rate.

5. Digital Asset Tax (Effective 1st September 2023): The Act introduces Digital Assets Tax (DAT) at a rate of 3% on the transfer or exchange value of digital assets. The platform owner or facilitator responsible for the exchange must deduct the DAT and remit it to the Commissioner within five working days, along with a return of the payment and the deducted tax. Non-resident individuals who own a platform for digital asset exchange or transfer must register under the simplified tax regime.

6. Withholding Tax (Effective 1st July 2023): The Act reduces the rental income withholding tax rate for residents from 10% to 7.5%, while the rate for non-residents remains at 30%. A withholding tax certificate will be issued for tax withheld on rental income upon filing the rental income withholding tax return. The Act also reintroduces a 5% withholding tax rate for residents on sales promotion, marketing, and advertising services, regardless of the amount.

7. VAT (Effective 1st July 2023): The Act amends the provision that allows a person to apply for a VAT refund on bad debts. It eliminates the requirement for the debtor to be declared legally insolvent and replaces it with the condition that the debtor must be placed under statutory management through the appointment of an administrator, receiver, or liquidator. Additionally, the Act extends the time for suppliers who have not received payment for taxable supplies to claim a refund from four to ten years from the date of supply.

Kenya Employment Act 2007 (download here)

The Kenya Employment Act of 2007 holds great importance as a fundamental law that oversees employment practices within Kenya. Its main purpose is to establish a comprehensive legal structure to regulate the relationships between employers and employees, as well as to define working conditions and the respective rights and responsibilities of both parties within the country. Encompassing a wide array of employment facets, the Kenya Employment Act of 2007 addresses essential elements such as recruitment procedures, terms of employment, wages and compensation, working hours, leave entitlements, the process of terminating employment, and methods of resolving disputes.

The Employment Act – Statutory Payments

The Employment Act of Kenya, Section 19(1), permits the employer to deduct any amount from an employee’s wage as a contribution to a fund or program that the employee has consented to support and that has been approved by the commissioner for labor. Sec 49(2) of the Employment Act provides that “any payments made by the employer under this section shall be subject to statutory deductions” In subsection 49 (2), the legislature employs the term “shall,” signifying a mandatory instruction to employers who disburse any funds based on a Labour Officer’s recommendation or a court order to perform statutory deductions from the total monthly payment as outlined in subsection 49 (1) (c).

Tax Payments

PAYE

What is PAYE?

Pay As You Earn (PAYE)- This refers to a system where the employer deducts tax from an employee’s salary before paying them and sends the deduction to the Government. The PAYE rates are on a graduated scale with the lowest rate being 10% which is applicable for a salary of up to KES 24,000 and the highest rate of 30% for income of KES 32,333 and above as per below illustration.

Who Pays PAYE?

Residence – All employees who are resident in Kenya are required to pay income tax on all income earned in in or out of Kenya.Residence- An individual is tax resident if they have a permanent home in Kenya and were present for any period in a particular year of income under consideration or present in Kenya for 183 days or more in that year Or Present in Kenya in that year of income and in each of the two preceding years of income for periods averaging 122 days in each year Non Resident – Non-resident employees are taxable only on their income earned from within Kenya or derived from Kenya.

Penalty for not Complying to PAYE

Offense	Penalty
Late filing of PAYE	25% of the tax due or Kshs. 10,000, whichever is higher.
Late payment of PAYE tax	5% of the tax due and an interest of 1% per month

Source: https://www.kra.go.ke/business/business-compliance-penalties/business-how-to-file/business-offences-penalties

How do I pay for PAYE?

• File Returns – PAYE returns are submitted online via iTax . If you have no PAYE to declare, you are required to submit a NIL return.
• After filing the return online, you are required to generate a payment slip via iTax which you will present at any of the KRA appointed banks to pay the tax due.
• You can make payments via Mpesa.
• Use the KRA Pay bill number 572572.
• The Account Number is the Payment Registration number quoted at the top right corner of the generated payment slip

Value Added Tax (VAT)

What is VAT

VAT is a consumer tax charged on the supply and importation of taxable goods or services made in Kenya. A trader will be required to apply on the iTax system for VAT obligation under only these two circumstances: – The trader expects to have or has an annual taxable turnover of Kshs. 5,000,000 and above.Voluntary registration by a trader who makes or intends to make taxable supplies.

When is VAT payable?

It is important to note that tax is due and payable when; a) goods or services are supplied to the purchaser. b) An invoice is issued in respect of the supply. c) Payment is received for all or part of the supply. A certificate is issued by an architect, surveyor, or any person acting as a consultant or in a supervisory capacity in respect of the service.

What is the penalty for late filing and paying?

Penalty on late filing: Whichever is higher between, Kshs. 10,000 and 5% of the tax due.

Penalty on late payment: 5% of the tax due and a late payment interest of 1% per month on the unpaid tax until the tax is paid in full.

Withholding Tax

Withholding Income Tax is a tax deducted at the source. When certain payments are made, the person making the payment deducts the applicable tax rate and remits it to the Commissioner on behalf of the recipient. Examples of payments subject to withholding tax include management, professional or training fees, consultancy fees, legal fees, audit fees, contractual fees, winnings, appearance or performance fees, royalties, interest, deemed interest, and dividends. The percentage deducted varies based on the type of income and whether the recipient is a resident or non-resident.

How to Pay Withholding Tax

To pay Withholding Tax, follow these steps:

1. Remittance Deadline: Any amount withheld should be sent to KRA on or before the 20th day of the following month.

2. Online Payment: Use the iTax platform to make the payment online. Generate a payment slip and take it to any designated KRA bank to settle the tax amount.

3. Mpesa Payment: Alternatively, you can pay via Mpesa using KRA Pay bill Number 572572.

4. Account Number: For Mpesa payments, provide the Payment Registration number mentioned at the top right corner of the generated payment slip.

5. Withholding Certificate: Upon successful remittance, KRA will send a Withholding Certificate to the email registered with iTax.

What is the penalty for late filing withholding tax?

Where a payer fails to withhold tax, the tax shall be deemed to be due and payable by him as though he was the person who earned the income and the due date for the payment shall be the date on which the amount of tax should have been remitted to KRA. A late payment penalty of 5% shall also apply on the tax due together with a late payment interest of 1% per month for the period that the tax remains unpaid.

Installment Tax

Installment Tax is an estimated income tax paid periodically to KRA in anticipation of the tax payable for a year of income. It is a form of advance tax paid in four equal installments before the year of income ends and business accounts are prepared.

Who pays Installment Tax

Installment Tax is applicable to all individuals and non-individuals, except those subject to Turnover Tax (TOT). Individual taxpayers with a tax liability of over Kshs. 40,000, not fully covered by PAYE, are required to pay Installment Tax. There are two methods to calculate Installment Tax: prior year basis, where prior year tax payments are multiplied by 110%, and current year basis, estimating current year profits and taxes. The installments are evenly spread at 25% of the tax due, payable on the 20th day of the 4th, 6th, 9th, and 12th months, except for Agricultural Sector taxpayers, who pay 75% in the 9th month and 25% in the 12th month. Instalment Tax is paid via iTax, generating a payment slip, and presenting it with a cheque at partner banks.

What is the penalty for late filing installment tax?

Late payment incurs penalties as per Income Tax regulations. The penalty for underpaying Installment Tax is 20% of the difference between the payable and the actual amount.

Installment Tax already paid in the year of income can be claimed as an advance payment made during that year.

Turnover Tax

Turnover Tax(TOT) is a tax charged on gross sales of a business as per Sec. 12(c) of the Income Tax Act.

Who should pay TOT?

Turnover Tax (TOT) is payable by resident persons whose gross turnover from business is more than Kshs. 1,000,000 and does not exceed or is not expected to exceed Kshs 50,000,000 in any given year.

TOT does not apply to:

Persons with business income below Ksh. 1,000,000 and above Kshs. 50,000,000 per annum

Rental Income, Management, Professional and Training Fees, Any income that is subject to a final withholding tax under the Income Tax Act

What is the penalty for Non-Compliance?

TOT late filing penalty is Kshs. 1,000 per month (wef 25/04/2020)

Late payment penalty is 5% of the tax due

Interest on unpaid tax is 1% of the principal tax due.

Digital Asset Tax

What is the Digit Asset Tax

Starting on September 1st, 2023, a new tax is in place for digital assets. This tax is applied to any income generated from the transfer or exchange of digital assets, which are defined as intangible items of value, including but not limited to cryptocurrencies, Non-Fungible Tokens (NFTs), token codes, and any electronic representations of value that can be exchanged, stored, or transferred.The transfer or exchange of digital assets will be subject to a 3% tax rate, based on the value of the assets. The platform owner responsible for facilitating the exchange must deduct this tax from the recipient’s income and then promptly remit it to the Kenya Revenue Authority (“the KRA”) within five business days.

Who pays Digital Service Tax?

Resident and Non – Resident:

i). Digital service providers

ii). Digital market place providers, or

iii). Their appointed tax representatives (in the case of non-resident digital service providers or digital marketplace providers without a permanent establishment in Kenya

Contribution Payments

NHIF

What is NHIF

Employees in Kenya are required to contribute to the NHIF. There is no corresponding employer contribution. The contributions are graduated, with the minimum being KES 150 and maximum contribution currently being KES 1,700 per employee for employees earning more than KES 100,000 per month. The Government introduced a relief on insurance including the NHIF. 15% of the NHIF deduction will be treated as a relief to reduce the tax liability.

Who Benefits From NHIF

• Kenyan residents including both foreigners allowed to study or work in Kenya.
• Minimum age of 18 years. There is no upper age limit for NHIF.
• Earns an income from Kenya (employed/self employed)
• Earns an income of more than KSH1000 in any given month or KSH12,000 per year
• Works under contract or casual basis. It also includes the voluntary contributors.
• Voluntary contributors

All Kenyans above 18 years are eligible to register for NHIF membership. One can apply for a single membership or family membership which allows them to include their declared spouse and children below 18 years of age. NHIF doesn’t check for pre-existing conditions.

Penalties for Not Paying NHIF

Every registered self-employed member is required to make a monthly contribution of KES 500 to their accounts. Existing members are required to pay on or before the 9th of the following month to avoid penalties.

If payments are made after 9th of the following month, then a penalty of 10% (KES 50) of the voluntary monthly contribution will be surcharged. A member will be required to pay outstanding arrears and/or penalties to access services

How to Pay NHIF

1. Go to M-PESA Menu, click on Lipa Na Mpesa then PayBill.
2. Enter 200222 as the PayBill Number.
3. Enter your National Identification Number as the Account Number
4. Enter KES 500 for every month you wish to pay for or KES 6,000 if you wish to pay for the whole year. The system can only accept a maximum of KES 6,000 at a go if you wish to make bulk payments.
5. Enter your Safaricom PIN Number.
6. You will receive a message from MPESA confirming that you have successfully made the contribution. The M-PESA message you will receive is proof of payment

NSSF

What is NSSF

The National Social Security Fund (NSSF) is a government-run program aimed at ensuring Kenyans have a foundational level of financial security when they retire. In accordance with the amended NSSF Act, the new NSSF Pension contributions will amount to 12% of an individual’s pensionable earnings, with 6% contributed by the employee and 6% by the employer. However, the total contribution is capped at KES 2,160, and this maximum amount will be shared equally between the employee and the employer. To calculate the NSSF dues, the Upper Earning Limit (UEL) is set at KES 18,000, while the Lower Earning Limit (LEL) is set at KES 6,000. Additionally, the NSSF is divided into two tiers: Tier 1 represents 6% of earnings up to KES 6,000. Tier 2, on the other hand, corresponds to 6% of the remaining amount after deducting KES 6,000 from KES 18,000.

Who is Benefits From NSSF

• Age/Retirement Benefit – Members are eligible for this benefit when they reach the age of 55 years, or when they ultimately retire from regular employment.
• Withdrawal Benefit – Members are eligible for this benefit if they are at least 50 years of age and they have retired from regular paid employment.
• Survivor Benefits -This benefit is paid to: Dependant(s) / relative(s) of a deceased member.
• Invalidity Benefits – Members who are certified to be permanently incapable of working because of physical or mental disability or Members who are at least 50 years of age and suffer from a partial incapacity of a permanent nature that prevents them from undertaking employment.
• Emigration Benefit-Members emigrating from Kenya to a country which is not a member of the East African Community, without the intention of returning to reside in Kenya.

Penalties for Not Paying NSSF

How to pay NSSF via M-Pesa should be deducted and submitted in full by the 15th of every month. However, late payment of the monthly contributions will attract a 5% penalty of the total contributions for each month or part of the month the employer or employee has failed to pay their contribution.

How to Pay NSSF

1. Open your Mpesa Menu and go to Lipa na Mpesa
2. Select Paybill option
3. Enter the Paybill number(333300)
4. Enter your account number( Your NSSF number)
5. Input the amount you want to contribute
6. Finally, put in your Mpesa pin number and complete the transaction

National Industrial Training Levy

All employers are required to pay to the Directorate of Industrial Training a monthly levy of KES 50 per employee. The only exemption is for employers remitting the tourism levy.

Work Injury Benefit Act Insurance (WIBA)

This is a policy that covers the employees of the insured whilst on duty and engaged in the execution of the Insured’s business &/or any project undertaken by the Insured, against accidental bodily injury, disablement or death.

WIBA Insurance is a legal requirement for every employer in Kenya to have for the safety and health compensation plan for their employees. The cost of WIBA Insurance Policy in Kenya varies for different insurance companies. Although, the cost will depend on the coverage plan you are going for.

In conclusion

SMBs must prioritize compliance with critical statutory payments to maintain good standing with regulatory authorities and ensure the smooth operation of their businesses. Pay As You Earn (PAYE), National Social Security Fund (NSSF), National Hospital Insurance Fund (NHIF), Work Injury Benefits Act (WIBA), Value Added Tax (VAT), and other statutory payments are essential obligations that businesses need to fulfill. By understanding and fulfilling these obligations, businesses can avoid penalties, legal issues, and reputational damage.

photo source: Google