How to Calculate Tax Payable on Taxable Salary in Kenya

Understanding how to calculate the tax payable on your taxable salary in Kenya is essential for both employees and employers. The Pay As You Earn (PAYE) system ensures that taxes are collected efficiently from individuals in gainful employment. The Kenya Revenue Authority (KRA) manages the collection and remittance of PAYE taxes, contributing to the government's provision of essential social and economic services. In this article, we'll delve into the details of calculating tax payable on taxable salary, exploring the tax slab system, allowable deductions, and various types of tax relief.

PAYE: An Overview

PAYE, which stands for Pay As You Earn, is a method the Kenyan government employs to collect taxes from employed individuals. It is a mandatory tax applied to all employees' income, both resident and non-resident, in various forms, such as wages, salaries, commissions, bonuses, and allowances. The responsibility of deducting and remitting PAYE lies with employers, who withhold the tax amount before disbursing salaries and wages to their employees. The process ensures a steady flow of revenue to the government throughout the year. The PAYE year in Kenya runs from January 1st to December 31st, and employers must file and remit the tax every month.

Understanding the Tax Slab System

The calculation of PAYE is based on a progressive tax slab system. Different income levels fall under specific tax brackets, each with its corresponding tax percentage. Employees with higher incomes pay a higher percentage of their income as tax. The tax slab system ensures fairness by distributing the tax burden according to one's ability to pay. The current tax slab applicable for PAYE calculation is as follows:

1. On the first Ksh. 288,000: 10%
2. On the next Ksh. 100,000: 25%
3. On the next Ksh. 5,612,000: 30%
4. On the next Ksh. 3,600,000: 32.5%
5. On all income above Ksh. 9,600,000: 35%

For example, consider an individual with a gross taxable income of Ksh. 500,000:

• On the first Ksh. 288,000: 288,000 * 0.10 = Ksh. 28,800
• On the next Ksh. 100,000: 100,000 * 0.25 = Ksh. 25,000
• Total Tax: 28,800 + 25,000 = Ksh. 53,800

Deductions and Tax Relief

In calculating PAYE, several deductions and reliefs are considered to arrive at the final tax payable. Deductions are amounts subtracted from the gross taxable income before applying the tax slab percentages. Here are some key deductions and tax reliefs:

1. Mortgage Interest Deduction: If an individual borrows money for the purchase or improvement of residential premises, the interest paid on the loan is deductible, up to a maximum of Ksh—300,000 per annum.
2. Pension Contributions: Employees can deduct their contributions to registered pension funds up to a maximum of Ksh—20,000 per month.
3. Personal Relief: Resident individuals are granted relief, currently set at Ksh. 28,800 per annum or Ksh. 2,400 per month.
4. Insurance Relief: Employees who pay insurance premiums for life, health, or education policies for themselves, their spouses, or children are eligible for relief, up to 15% of the premiums paid or a maximum of Ksh—60,000 per annum.

Using the PAYE Calculator

The KRA provides an online PAYE calculator on its website, allowing individuals to determine their tax obligations accurately. Employees can calculate their net taxable income and the corresponding tax payable by entering basic salary, benefits, allowances, and applicable deductions. The calculator also considers contributions to the National Social Security Fund (NSSF), National Health Insurance Fund (NHIF), and National Housing Development Fund (NHDF).

Filing and Payment Process

Employers are responsible for filing PAYE returns online via the iTax platform. Employers must submit a NIL return if there are no PAYE obligations to declare. After filing the return, a payment slip is generated on iTax, which can be presented at designated KRA banks for payment. M-Pesa payments are also accepted using the KRA Pay bill number 572572.

Late Filing and Payment Penalties

Late filing and payment of PAYE attract penalties. The penalty for late filing is 25% of the tax due or Ksh. 10,000. The penalty for late payment is 5% of the tax due plus an additional 1% per month on the unpaid tax until the total amount is settled.

READ ALSO: Paye Calculator KRA: How to Calculate PAYE in Kenya

Conclusion

Understanding how to calculate tax payable on taxable salary is crucial for employees and employers in Kenya. The PAYE system ensures a consistent collection of taxes, contributing to the government's provision of essential services. Individuals can accurately determine their tax obligations by considering the tax slab system, allowable deductions, and tax reliefs. The KRA's online PAYE calculator provides a convenient tool for calculating net taxable income and tax payable. Employers must file returns and remit payments on time to avoid penalties. As tax laws and regulations evolve, staying informed and compliant is essential for individuals and businesses.