PAYE stands for pay-as-you-earn. It is a system in Kenya where employers are required to withhold income tax from their employees' salaries and wages and remit it to the KRA on a monthly basis. This ensures that employees pay taxes throughout the year, rather than in one lump sum at the end of the year.
Here's a breakdown of how PAYE works in Kenya:
Employer Responsibilities:
Employers are responsible for deducting the correct amount of income tax from their employees' salaries based on their tax bracket.
They must use the prevailing Individual Income Tax Rates provided by the KRA.
The deducted tax needs to be remitted to the KRA by the 9th of the following month.
Employers are required to keep records of all PAYE Calculator deductions made.
Employee Responsibilities:
Employees are obligated to provide their employers with their accurate tax information, including their PIN.
They may be eligible for certain tax reliefs and deductions, which can lower their taxable income.
Recent Changes to PAYE in Kenya:
The Finance Act 2023 introduced some changes to the PAYE system in 2024, including:
Increased Tax Rates: The top tax rate was increased from 30% upto 35%. Kenya's new top tax rate of 35% is higher than several other countries in East Africa but not the highest. Uganda has a top rate of 40%, while Rwanda and Tanzania have a rate of 30%. This positioning can impact Kenya's attractiveness to expatriates and international businesses, as the overall tax burden influences decisions on regional headquarters and operations. Historically, Kenya's tax rates have seen substantial fluctuations. In the mid-1980s, the top tax rate was as high as 65%. However, a policy shift in the late 1990s aimed at economic liberalization saw these rates decrease, stabilizing at 30% for over two decades. The temporary reduction to 25% during the COVID-19 pandemic aimed to alleviate financial strain on individuals. The recent shift to 35% marks a significant policy turn, raising questions about its long-term impact on revenue and economic growth.
Affordable Housing Levy: A new 1.5% levy on gross monthly salary was introduced, to be contributed by both employers and employees. Another contentious aspect of the Finance Act 2023 is the affordable housing levy. Initially proposed as a 3% contribution, the final Act set it at 1.5% of the gross monthly salary, payable by both employers and employees, without a cap. This levy significantly impacts take-home pay and increases the cost of employment. The levy is non-refundable, further straining employees’ finances in a high-inflation environment.
Impact of the Changes:
These changes have sparked debate and may lead to:
Reduced Take-Home Pay: Employees, especially those in higher tax brackets, will see a decrease in their net pay due to increased tax deductions and the housing levy.
Compliance Burden: Employers may face challenges in implementing the new tax rates and levy within the short time-frame provided.
Potential for Lower Revenue Collection: Increased tax rates might discourage people from working formally or may lead to them demanding higher salaries to compensate for the lower take-home pay.
The Future of PAYE in Kenya:
The recent changes to the PAYE system in Kenya pose significant challenges, impacting both businesses and individuals. The government's need to increase revenue is understandable. However, a comprehensive review is necessary to evaluate the long-term effectiveness of these measures. Exploring a broader tax base, analyzing the impact on employee morale and economic competitiveness, and reassessing the design of the housing levy are crucial considerations. Open dialogue and strategic adjustments to the tax framework are essential to ensure sustainable economic growth and a fair distribution of the tax burden.
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