Understanding PAYE (Pay As You Earn)
PAYE is a tax collection system in Kenya where employers deduct tax from the employment income of their employees and remit it to the Kenya Revenue Authority (KRA).
What is Taxable Employment Income?
Taxable employment income includes all cash payments and the value of non-cash benefits exceeding Ksh 3,000 per month.
| Cash Pay | Non-Cash Benefits |
|---|---|
| Wages | Excess Mileage Reimbursement |
| Salary | Club Entrance Fees |
| Sick Pay | Subscription Fees |
| Leave Pay | |
| Commissions | |
| Bonuses | |
| Service Gratuity | |
| Allowances | |
| Director’s Fees | |
| Overtime | |
| Pension | |
| Entertainment | |
| Other Payments |
Who is Eligible for PAYE Registration?
Any entity paying salaries to employees must register for PAYE. The employer is responsible for deducting tax from employee emoluments and remitting it to KRA.
Income Tax Individual Tax Rates
Employers apply individual income tax rates ranging from 10% to 35%, effective from 1st July 2023. Tax rates are based on monthly and annual pay bands.
| Monthly Pay Bands (Ksh.) | Annual Pay Bands (Ksh.) | Rate of Tax (%) |
|---|---|---|
| On the first Shs. 24,000 | On the first Shs. 288,000 | 10 |
| On the next Shs. 8,333 | On the next Shs. 100,000 | 25 |
| On the next Shs. 467,667 | On the next Shs. 5,612,000 | 30 |
| On the next Shs. 300,000 | On the next Shs. 3,600,00 | 32.5 |
| On all income above Shs. 800,000 | On all income above Shs. 9,600,000 | 35 |
Personal Tax Relief
Personal relief of Kshs 2,400 or Kshs 28,800 per year is granted to residents. Additionally, a new tax relief on post-retirement medical funds has been introduced.
Insurance Relief
Employees who pay insurance premiums for life, health, or education policies can claim relief at 15% of premiums paid, up to Kshs 60,000 per annum.
Affordable Housing Levy
Both employers and employees contribute 1.5% of the employee’s gross monthly salary towards the Affordable Housing Levy.
PAYE Due Date
Employers must deduct and remit PAYE to KRA by the 9th day of the following month.
Non-Cash Benefits Chargeable to Tax
Non-cash benefits, such as motor vehicles provided by employers, housing, low-interest loans, and excess household utilities, are chargeable to tax.
Employment Income not Chargeable to PAYE
Certain benefits like meals provided by employers up to Ksh 4,000 per month, night-out allowances, and medical cover are not subject to PAYE.
Allowable Deductions
Deductions such as mortgage interest, pension contributions by employees, and allowable tax reliefs reduce the taxable income.
PAYE Return Filing and Payment
Employers must file PAYE returns online via iTax by the 9th of the following month. Payments are made through various channels, including banks, M-PESA, and debit/credit cards.
Penalties
Late filing and payment attract penalties, including a percentage of the tax due and late payment interest until the tax is settled.
By understanding these PAYE regulations, both employers and employees can navigate the tax system effectively while ensuring compliance with KRA requirements. For further assistance or clarifications, consult with a tax professional or visit the KRA website.