Statutory Deductions For Employers in Kenya

Employees’ salaries or wages are a very important subject especially when it comes to managing monthly deductions in Kenya. These statutory deduction figures and the other organization’s monthly deductions continue changing due to the country’s law amendments.

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.

Related: KENYAN EMPLOYERS GUIDE ON PENSION AND BENEFITS

Existing Statutory Deduction in Kenya

Mandatory deductions are legal requirements, and failure to register, deduct, and remit them to the relevant authorities attracts penalties and interest, resulting in additional costs for businesses or individuals and affecting compliance status. Employees have the option to opt out of any voluntary deductions at any time, but they must adhere to the deadlines and conditions specified in the arbitration agreement, court order, or law agreement. Among the fundamental statutory deductions are:

1. PAYE (Pay As You Earn) under the Income Tax Act Cap 470.
2. NHIF (National Hospital Insurance Fund) under NHIF Act Cap 255 and NHIF Act No. 9 of 1998.
3. NSSF (National Social Security Fund) under NSSF Act No. 45 of 2013.
4. NITA (National Industrial Training Authority) under the Industrial Training (Amendment) Act, 2022.”

Pay as You Earn (PAYE)

This is a method for collecting taxes from both domestic and foreign workers. The PAYE must be deducted by the employer and remitted to the Kenya Revenue Authority, typically on or before the 9^th day of the following month; any person who pays emoluments to an employee(s) is required to register for the PAYE obligation. It is only applicable to people earning Ksh. 24,000 and above per month. However, some incomes are not subject to PAYE, such as;

• Medical coverage provided by an employer, 
• Tax relief designed to reduce the taxpayer’s tax burden (currently standing at Kshs 2,400 per             month or Kshs 28,800 per year), 
• Gratuity paid by an employer to a registered retirement benefits scheme subject to a limit of   Kshs.   240,000   per annum is not taxable.
• Meals provided to employees by the employer up to a limit of Ksh 4000 per month or Ksh 48,000 per year
• Pension contribution to a registered or unregistered scheme made by an employer. The allowable limit is Ksh 20,000 per month or Ksh 240,000 per year.
• Per-diem allowances of Kshs. 2,000 per day

Currently the PAYE  tax rates are as follows on the given monthly tax bands on the first Shs 24,000  10%, on the next Shs. 8,333  25%, on all income excess of Shs. 32,332 30%,Notably the Finance Bill 2023 has proposed a new pay rate of 35% for those earning Ksh. 500,000 and above. 

National Hospital Insurance Fund (NHIF)

Cap 255 of the Kenyan law provides for the creation of a National Hospital Insurance Fund; to provide for contributions to and the payment of benefits out of the fund.

Any person deriving his/her income in Kenya from salaried employment is liable to a standard contribution or a person who derives income from self.

Employers deduct from the employee’s income and remit to NHIF. This contribution is usually graduated with a minimum of Kes 500 and a maximum of Kes 1,700 per employee earning Kes 100,000 every month. However, we should take note of a 15% Insurance relief that was introduced by the Finance Act 2021 and took effect on 1st of January, 2023. Insurance relief is calculated as follows:

Insurance Relief = 15% (Insurance Premiums + NHIF Contributions) 

But this relief shall not exceed Kshs. 5,000.00 per month or Kshs. 60,000.00 per year.

The NHIF Cover  acts as a medical insurance cover that enables you and your family to enjoy an unparalleled benefit package.

By enrolling in an NHIF accredited facility, upgrading in your NHIF cover, taking advantage of NHIF discounts and maintaining a healthy lifestyle, maximize your NHIF benefits and ensure you have access to quality healthcare services.

National Social Security Fund (NSSF)

The NSSF Act of 2013 provides for the creation of a fund to provide for contributions to and the payment of benefits out of the fund. The objective of the fund is to provide social security for its members and their dependents against contingencies provided in the act.

The contributions are classified into;

• Old rate -Here, the employer and employee each contribute Kes 200 to the fund making a total contribution of Kes 400
• Tier I – It is set at 12 % of the lower limit of Kes 6,000, which translates to Kes 720 with an equal contribution of Kes 360 by both employer and employee.
• Tier II – A cumulative 12% of 18,000 (upper limit) which is Kes 2,160 is set.12 % of the lower limit which is Kes 720 will be taken as Tier I and the balance of Kes 540 will be Tier II.
• These contributions are usually deducted by the employer from the employee’s income as per the act and must be filed and remitted before or on the 15^th of the following month.

There have been legal impediments since the National Social Security Fund (NSSF) Act No. 45 of 2013 (“the Act”) was enacted in Dec. 2013, giving rise to new NSSF rates. In Feb. 2023, the Court of Appeal found that The Employment and Labour Relations Court (ELRC) erred in pronouncing the Act illegal. It determined that ELRC had no authority to do so, as that was a preserve of the High Court. Consequently, the Act is now legal, allowing the government to enforce it.

There will be a lower earnings limit (LEL) for employees who make less than Kes 6,000, with an upper earnings limit (UEL) for employees who earn Kes 18,000 or above.

The monthly matching contributions by both employees and employers has risen from the current Kes 400 to 12% of a worker’s monthly pensionable income (6% from the employee and 6% from the employer – both contributing an equal amount), with a maximum contribution of Kes 2,160 for workers earning more than Kes 18,000 per month. Employee contributions will still be drawn directly from their salaries and wages while employer contributions will still come directly from the employer.

Contributions relating to the earnings below the LEL of the earnings (a maximum of Kes 720) will be credited to what will be known as a Tier I account while the balance of the contribution for earnings between the LEL and the UEL (up to a maximum of Kes 1,440) will be credited to what will be known as a Tier II account.

National Industrial Training Authority (NITA)

Employers are required to pay NITA levy annually usually at a monthly rate of KShs 50 per employee including a casual employee as per Section 5 (Cap.237) of the Industrial Training Act.

 An employer shall pay the training levy to the Commissioner-General at the time when an employee’s salary is payable and shall be remitted to the Commissioner-General not later than the fifth day of the month following the month in which the levy becomes due. The payment is done through a unified payroll system provided by The Kenya Revenue Authority (KRA), which acts as the collecting agent.

The benefits of the fund are;

• The cost of the training staff is undertaken by NITA based on the terms and conditions of the levy.
• Full or partial reimbursement of costs incurred on employees.
• Legal requirement compliance.

Changes under the Industrial Training (Amendment) Act, 2022 

The Act was passed on 4th April 2022 with an effective date of 22nd April 2022. It notably introduced the following changes to the principal Act:

Revenue Collection: The Commissioner-General of the Kenya Revenue Authority will be responsible for the assessment and collection of training levies from employers and shall exercise all the powers conferred under the Kenya Revenue Authority Act and Income Tax Act. 

Payment deadline for Training Levy: An employer shall pay the training levy to the Commissioner-General at the time when an employee’s salary is payable and shall be remitted to the Commissioner-General not later than the 5^th day of the month following the month in which the levy becomes due. Training levy shall not be deducted from the emoluments of the employee.

Compliance and Powers of enforcement: The Income Tax Act and the Kenya Revenue Authority Act shall apply in collection and enforcement of training levies. This includes payment and recovery of the levies and penalties, assessment of levy payable, filing of returns, furnishing of information and production of documents; and keeping of records. 

Housing Levy

The proposed housing levy under the Finance Bill seeks to deduct 3% from salaried employees.The bill proposes to introduce the contribution to the National Housing Development Fund by both the employer and the employee.

Conclusion

It’s important to note that specific details and regulations may change over time, so it’s advisable to consult the most up-to-date information or consult with a tax professional for accurate and current guidance. Ronalds LLP is the tax professional firm of your choice.

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