Employment income is one of the specified sources of income chargeable to tax. Employees are charged to tax on all benefits received from employment (both cash and non cash) Employers are required to operate a pay as you earn scheme where all benefits chargeable to tax are assessed on monthly basis on all employees.
Monthly tax to be deducted
To arrive at monthly tax to be deducted:-
- Determine the total of all benefits chargeable to tax
- Deduct allowable deduction to get the chargeable pay
- Charge tax on chargeable monthly pay per monthly tax tables (see tax rates)
- Deduct from tax charged monthly personal reliefs.
Gains and Profits from Employment
Gains /profits from employment or services rendered will include both cash and non-cash payments.
- Wages, salary, leave pay, sick pay, payment in lieu of leave, directors’ fees and other fees, overtime, commission, bonus, gratuity or pension whether payable monthly or at longer or shorter intervals.
- Cash allowances, e.g. house or rent allowance, telephone allowance, round sum allowance etc.
- The amount of any private expenditure of the employee paid by the employer otherwise than as a loan, e.g. house rent, grocery bills, electricity, water, telephone bills, school fees,
- Amount of subsistence, travelling, entertainment or other Allowance, however where the Commissioner is satisfied that subsistence, travelling, entertainment or other allowance represents solely the reimbursement to the recipient of an amount expended by him wholly and exclusively in the production of his income from the employment or services rendered then the calculation of the gains or profits of the recipient shall exclude that allowance or expenditure;
- Excess per diems. Cash allowances to employees working outside their work stations popularly known as per diems in excess of Sh.2000 are taxable.
- Tax free remuneration. There are certain instances when an employer wishes to pay his employees salaries negotiated net of tax. In such circumstances, the employer bears the burden of tax on behalf of such employees. The tax so paid by the employer for the employee becomes a benefit chargeable to tax
Non cash employment benefits
(i) benefits in kind
Where an employee enjoys a benefit, advantage or facility of whatsoever nature in connection with employment or services rendered; the value of such benefit should be included in employee’s earnings and charged to tax. The minimum taxable aggregate value of a benefit, advantage or facility is Kshs. 3,000 per month or Kshs. 36,000 per annum.
In the case of an employee share ownership plan, the value of the benefit shall be the difference
between the market value per share and the offer price per share at the date the option is granted
by the employer. For clarification purposes, benefits arising from ESOPs not registered by the
Commissioner are taxable.
(iii)Car benefit – section 5 (2b)
Where an employee is provided with a motor vehicle by employer, the chargeable benefit for private use shall be the higher of the rate determined by the Commissioner (based on the C.C rating) and the prescribed rate of benefit. Where such vehicle is hired or leased from third party, employees shall be deemed to have received a benefit in that year of income, equal to the cost of hiring or leasing.
The “prescribed rate of benefit” is currently 2% per month of the initial cost of the motor vehicle
(iv) Provision of Servants
This include a house servant, a cook, watchman, gardener, an Ayah (maid), bodyguard, messenger, chauffer etc. The values of such benefits are taxed on the higher between the market cost and actual cost incurred by the employer, the employee is taxed on the higher.
(v) Provision of Services
They include water, telephone, electricity, furniture, alarm system etc. The CDT quantifies the value of such benefits to the employee through the quantified benefits tables. Where the quantified benefit is different from the cost of providing the service to the employer, whichever is the greater shall be the taxable value.
Non cash benefits
He receives lunch in the staff restaurant worth Sh.100 per day. (Assume 6 working days a week)
Has a company car Nissan X-trail of 2000cc. This car cost Afri-Elec Sh.1800,000 in the year 2009
He attended a ten day seminar in Nanyuki and received a daily cash allowance of Sh.3,200
Was voted the employee of the year and was awarded an Ipad valued at Sh.120,000
Required: Determine Mr. wephukhulu’s net tax liability for the year of income 2017
(vi) Housing benefit – section 5(3)
The housing benefit for ordinary employees and a whole time service director shall be the higher of 15% of total income (or employment income, in case of whole time service director), the fair market rental value and the actual rent paid by the employer.
- If employer pays rent under an agreement not made at arm’s length with a third party, the value of quarters shall be; the fair market rental value of the premises in that year or rent paid by the employer; whichever is higher, or
- Where the premises are owned by employer; the fair market rental value of the premises in that year is to be taken.
Special case: Agricultural Employee
An agricultural Employee (Including a whole time service director) is one who is required by terms of employment to reside on a plantation or farm;-
His housing benefit shall be 10% of his gains or profits from employment minus any rent charged to the employee. This is subject to employer obtaining prior approval from Domestic Taxes Office
- In calculating the housing benefits employer is required to deduct rental charges recovered from the employee or director. The amount remaining is the chargeable value to be included in the total taxable pay.
- If the premises are occupied for part of the year only, the value is 15% of employment income relative to the period of occupation less any rental charges paid by employee/director. (Chargeable value shall be reduced by rent paid by an employee).
- Any employer who provides other than normal housing to an employee should consult his local Domestic Taxes office for advice regarding the value of such housing.
Non-Taxable Benefits from Employment
i. passages to expatriate staff
When an employer himself pays for or reimburses the cost of tickets for passages, including leave passages for his employee and family, the value of the passages is a non-taxable benefit of the employee provided the employee is
i. recruited outside Kenya
ii. is in Kenya solely for the purpose of serving his employer and
iii. he is not a citizen.
Where, however, such employee receives a cash sum either periodically or in one amount which he is free to save or spend as he chooses or for any other purposes and for the expenditure of which he does not have to account to the employer, the amount received is a taxable cash allowance.
ii. Medical services and medical insurance
Where an employer provides all its employees (including directors) with free medical services or free medical insurance, the value of such medical service or insurance is not a taxable benefit on the employee.
Please note that:
a. In the case of medical services provided to a director other than a whole time service director shall be the limit which will be prescribed by the Minister from time to time. The current limit is Kshs.1,000,000 per year.
b. The medical insurance must be provided by a provider who is approved by the Commissioner of Insurance.
iii. Employers contributions to registered or unregistered pension scheme or provident fund
Contributions made by employers on behalf of employees to retirements schemes is not taxable on the employee. However, contributions paid by a non-taxable employer to unregistered pension scheme or excess contributions paid to a registered pension scheme, provident fund or individual retirement fund; shall be employment benefit chargeable to tax on the employee.
Other non taxable benefits
a) Employee staff meals
Staff meals provided by employers to low income employees are tax free.
Note: A low income employee is defined as an employee whose marginal rate of tax on income does not exceed the rate of 20% (i.e below the 3rd tax band).Free meals offered to low income employees by the employer within his premises
b) Education benefit extended to low income employee working for educational institutions provided the courses are pursued in the same institution
c) School fees:
Education fees of employee’s dependants or relatives will not be taxed on the employees provided the same has been taxed on the employers.
Allowable Deductions from Employment Income
(i) Defined benefit fund or defined contribution fund
An employee’s contribution to any registered defined benefit fund or defined contribution fund is now an admissible deduction in arriving at the employee’s taxable pay of the month. The employee’s deductible contribution is the lesser of:
(a) 30% of pensionable pay.
(b) Employee’s actual contribution.
(c) Ksh.20,000 per month
This limit applies to persons contributing both to a registered scheme and the NSSF
(ii) Home ownership savings plan
A depositor (employee) shall in any year of income be eligible to a deduction up to a maximum of Kshs. 4,000 /- (Four thousand shillings) per month or Kshs. 48,000/- per annum in respect of funds deposited in “approved Institution” under “Registered Home Ownership Savings Plan”, in the qualifying year and the subsequent nine years of income.
Further, with effect from 1st January 2007 interest earned on deposits not exceeding Kshs. 3 million which deposits are made in qualifying institutions shall be exempt from tax provided that:-
(iii) owner occupied interest (mortgage interest relief) – section 15(3)(b)
In ascertaining the total income of a person for a year of income interest paid on amount borrowed from specified financial institution shall be deductible. The amount must have been borrowed to finance either:-
- The purchase of premises or
- Improvement of premises – which he occupies for residential purposes.
The amount of interest allowable under the law must not exceed Kshs.150,000 per year (equivalent to Kshs. 12,500 per month).— Kshs 300,000 P.A for the year 2017