FINANCE
Insights Into The Taxation Of Employment Income In Kenya
By CPA Peter Kinuthia
Just like any other persons generating income in Kenya , gains or profits paid to a resident person in respect of any employment or services rendered by him in Kenya or outside Kenya or to a non-resident person in respect of any employment with or services rendered to an employer who is resident in Kenya or the permanent establishment in Kenya of an employer who is not so resident are liable to taxation .
Taxable Income
As per the provisions of the Income Tax Act , gains or profits from employment liable to taxation include :
Cash benefits
Wages , salary , leave pay , sick pay , payment in lieu of leave , fees , commission , bonus , gratuity , or subsistence , traveling , entertainment or other allowance received in respect of employment or services rendered , and any amount so received in respect of employment or services rendered in a year of income .
Non-cash gains and benefits
Liable non-cash benefits are taxed at the higher of actual cost to the employer and the market value . This include ;
Motor vehicle : Where an employee is provided with a motor vehicle by his employer the car benefit thereof is the higher of
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Through the Pay As You Earn ( PAYE ) mechanism , employers are statutorily obligated to deduct income tax from their respective employees taxable emoluments ( both cash and non-cash ) and remit the same to Kenya Revenue Authority . the prescribed rate of 2 % of the initial cost to the employer the Commissioner ’ s prescribed rates . If the motor vehicle is leased from a third party , the actual lease rentals paid or payable .
Housing benefit is taxed as follows : ( i ). For whole time service Directors and other employees - The value of housing is taken as 15 % of their total income excluding the value of those premises and capital gains . ( ii ). Agricultural Employee and Whole-Time Service Director who are required by terms of employment to reside on a plantation or farm - The value of housing is taken as 10 % of their gains or profits from employment .
Any amount of rent charged by the employer is deducted in order to arrive at the taxable housing benefit .
Employee Share Ownership Program ( ESOPS ): This benefit is taxed at the point when the employee exercises the option .
Others include : Low benefit interest rates ; Loans at interest rates that are lower than the prevailing market rate ; Household utilities - including telephone , electricity , water , security , domestic expenses ; Pension contribution paid by a tax-exempt employer to an unregistered scheme ; Pension contribution paid by an employer to a registered or unregistered scheme in excess of the allowable amount of Kshs . 20,000 per month or Kshs . 240,000 per year ; Furniture - the taxable benefit is 1 % of the cost of furniture to employer ; and Telephone - the deemed taxable value of telephone ( landline and mobile phone ) benefit is 30 % of the bills .
Deductions
In order to arrive at the net taxable income , the following amounts are tax deductible expenses ;
Mortgage Interest Deduction : Interest paid on an amount borrowed from the first five financial institutions specified in the fourth Schedule of the Income Tax Act including : A bank or a financial institution licensed under the Banking Act ; An insurance company licensed under the Insurance Act ; A building society registered under the Building societies Act ; The National Housing Corporation established under the Housing Act ; and A co-operative society registered under the Co-operative Societies Act .
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