Instalment Tax in Kenya is a crucial aspect of income tax compliance for individuals and businesses whose estimated tax liability exceeds Kshs. 40,000. With mounting pressure on businesses to remain tax-compliant while managing cash flow, understanding how instalment tax works is essential.
Let’s break it down.
What is Instalment Tax?
Instalment tax is an advance income tax payment made to the Kenya Revenue Authority (KRA). It is paid periodically over the course of the financial year to cover the estimated income tax liability of a business or individual.
This system is established under Section 12 of the Income Tax Act, Cap 470, and is designed to help taxpayers avoid last-minute financial strain by spreading out tax obligations.
Instalment Tax Due Dates in Kenya
If your business follows the standard January–December financial year, your instalment tax is paid in four equal instalments:
| Instalment | Due Date | Share of Tax |
|---|---|---|
| 1st | 20th April | 25% |
| 2nd | 20th June | 25% |
| 3rd | 20th September | 25% |
| 4th | 20th December | 25% |
For Agricultural Sector
Entities in the agricultural sector follow a different structure:
| Instalment | Due Date | Share of Tax |
|---|---|---|
| 1st | 20th September | 75% |
| 2nd | 20th December | 25% |
Who is Required to Pay Instalment Tax?
You are required to pay instalment tax if:
- Your estimated tax liability for the year is Kshs. 40,000 or more
- You are not taxed under Turnover Tax (ToT)
- Your entire income is not taxed under PAYE
Instalment tax acts as a tax credit—meaning the total you pay throughout the year offsets your final tax bill. Any remaining balance must be cleared within four months after your financial year ends (typically by April 30th for December year-ends).
How to Calculate Instalment Tax
There are two methods to compute your instalment tax:
1. Prior Year Basis
Calculate 110% of your previous year’s tax liability, and divide it evenly across the required instalments.
2. Current Year Basis
Estimate your current year’s profit, compute tax based on that estimate, and subtract any expected withholding tax.
📌 The current year basis is ideal for new businesses or those transitioning from losses to profitability.
What Happens If You Pay Late or Underpay?
Failure to comply with instalment tax obligations attracts stiff penalties:
- 5% penalty on late payments
- 20% penalty on underpayments (i.e., paying less than what was due for any instalment)
These penalties can significantly increase your tax burden and expose your business to compliance risks.
Why Instalment Tax Planning Matters
Understanding and complying with instalment tax in Kenya isn’t just a regulatory requirement—it’s a strategic financial move. By planning ahead and aligning your cash flows with your tax schedule, you:
- Avoid penalties and interest
- Maintain a good standing with KRA
- Improve financial predictability and stability
Need Help Navigating Instalment Tax?
At Ronalds LLP, we provide expert tax planning, compliance support, and advisory services tailored to your business structure. Whether you’re a startup or a well-established enterprise, we’ll help you stay ahead of your tax obligations—seamlessly.
Frequently Asked Questions (FAQs)
Q1: What if my tax liability is less than Kshs. 40,000?
➡️ You are exempt from paying instalment tax.
Q2: Is instalment tax refundable?
➡️ No, but it offsets your final tax liability. Overpayments may be carried forward or refunded by KRA upon request.
Q3: Can I revise my current year estimate?
➡️ Yes, but it must be done reasonably and supported by financial data to avoid underpayment penalties.
Written by Jane Esalano
