Starting this month, salaried employees will see a reduction in their take-home pay due to the Court of Appeal’s decision. This decision allows the Finance Act to be implemented, which means the government will retroactively apply taxes from July 1, 2023.
On July 28, the Court of Appeal lifted the orders that were preventing the Act’s implementation. This allows the Kenya Revenue Authority (KRA) to collect new taxes, aiming to raise an additional Ksh211 billion in the 2023/2024 Financial Year.
These changes will take effect at the end of August, including the mandatory housing levy and Pay As You Earn (PAYE) for higher-income earners. Other taxes in the Act comprise the Export and Investment Promotion Levy, a 16 percent Value Added Tax (VAT) on petroleum products, and turnover tax. Let’s explore how these changes will impact your payslip.
MODEL PAYSLIP
Gross Pay = Ksh20,000
NSSFKsh1,080
Taxable IncomeKsh18,920
Tax Before ReliefKsh0
Personal ReliefKsh0
Insurance ReliefKsh112.50
PAYEKsh0
NHIFKsh750
Housing LevyKsh600
Net PayKsh17,570
But what does it mean to “backdate taxes”? It implies that the tax authorities will apply the new taxes retroactively, collecting the deficit from July in the August payroll.
The Housing Levy mandates all Kenyan employees to contribute 1.5 percent of their gross monthly salary to the government’s Affordable Housing program. Employers also match these contributions.
This means that those who already received their July salary will need to contribute for both July and August (three percent of their gross monthly salary), followed by 1.5 percent in subsequent months.For example, an employee earning Ksh50,000 per month will contribute Ksh1,500 in August and Ksh750 in the following months.
Aside from the 1.5 percent Housing Levy, there’s another change involving PAYE. It introduces two new rates: 35 percent for employees earning above Ksh800,000 monthly and 32.5 percent for those earning between Ksh500,000 and Ksh800,000.For instance, an employee with a gross salary of Ksh600,000 will be deducted Ksh11,473 due to the 32.5 percent tax rate, along with the 1.5 percent housing levy.
To carry out these changes, the Kenya Revenue Authority (KRA) has been appointed as the collection agent. They’ve updated the iTax portal to reflect the new tax rates and provided instructions for taxpayers to download the updated return.The process faced legal challenges as Senator Okiya Omtatah sought to block the Act’s implementation, arguing it infringed upon Kenyans’ rights.
The High Court initially issued orders against the Act’s implementation, but the State appealed and the Court of Appeal ruled in their favor. The case will now proceed to a full trial with a three-judge bench.
So, in summary, these changes will lead to reduced take-home pay for salaried employees due to the retroactive implementation of new taxes, including the housing levy and updated PAYE rates.