Summary
Compliance with statutory deductions is crucial for employers to ensure seamless business operations and avoid legal repercussions.
This article explores vital statutory deductions in Kenya that employers must navigate to stay compliant and continue growing their businesses across Africa.
Understanding Kenya statutory deductions can often feel like stumbling upon a mysterious conversation or discovering unexpected deductions on your paycheck.
Seeing portions of your hard-earned income redirected to government coffers can be perplexing, raising questions about where your money goes.
While being familiar with well-known deductions like PAYE is important, navigating lesser-known deductions remains crucial.
For employers in Kenya’s business landscape, correctly managing these deductions from the outset is crucial. Compliance with these regulations ensures smooth operations and mitigates legal repercussions.
Statutory taxes in Kenya, including other organisational deductions, are subject to continuous changes due to amendments in the country's laws.
Section 19(1) of the Employment Act of Kenya empowers employers to deduct specific amounts from employees' wages for contributions to approved funds or programmes.
With the prerequisite that the employee consents and the programme is sanctioned by the Commissioner for Labour.
What are Statutory Deductions?
Statutory payments and deductions in Kenya are mandatory withholdings from income required by governments to fund various programs and services.
They can be deducted from an individual's earnings or from a business's revenue and are governed by specific statutes or regulations.
Not complying may lead to legal penalties. Typical statutory deductions include Income Tax, Social Security Contributions, Unemployment Insurance, Health Insurance Premiums, and Pension Contributions.
Governments implement these deductions in Kenya to generate revenue for community services, social welfare programs, and infrastructure development.
Unemployment Insurance and Social Security contributions, for example, provide a safety net for employees during job loss.
Contribute to stable employee-employer relationships by offering long-term benefits that address future uncertainties.
Key Statutory Deductions in Kenya
Mandatory deductions are legally required in Kenya, and failure to register, deduct, and remit them to the appropriate authorities can result in penalties and interest.
Adding costs for businesses or individuals and impacting their compliance status.
Employees can opt out of voluntary deductions but must follow the deadlines and conditions outlined in arbitration agreements, court orders, or legal agreements. Key statutory deductions include
Pay As You Earn (PAYE) under the Income Tax Act Cap 470
NHIF (National Hospital Insurance Fund) under the NHIF Act Cap 255 and Act No. 9 of 1998
NSSF (National Social Security Fund)- Act No. 45 of 2013
National Industrial Training Authority (NITA) under the Industrial Training (Amendment) Act, 2022
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Statutory Contributions 1
Pay As You Earn (PAYE)
This is a tax collection method for both domestic and foreign workers. Employers must deduct PAYE and remit it to the Kenya Revenue Authority (KRA) by the 9th of the following month.
Employers who pays employees is required to register for PAYE. This tax applies to individuals earning Ksh. 24,000 or more per month. However, certain incomes are exempt from PAYE, including
- Employer-provided medical coverage .
- Tax relief to reduce the taxpayer’s burden (currently Ksh. 2,400 per month or Ksh. 28,800 per year) Gratuity paid to a registered retirement benefits scheme is up to Ksh. 240,000 per annum
- Employer-provided meals, up to Ksh. 4,000 per month or Ksh. 48,000 per year
- Pension contributions to a registered or unregistered scheme, with an allowable limit of Ksh. 20,000 per month or Ksh. 240,000 per year
- Per diem allowances of Ksh. 2,000 per day
The current PAYE tax rates are
- 10% on the first Ksh. 24,000
- 25% on the next Ksh. 8,333
- 30% on all income above Ksh. 32,332
Additionally, the Finance Bill 2023 proposes a new tax rate of 35% for individuals earning Ksh. 500,000 and above.
Statutory Contributions
2
National Hospital Insurance Fund (NHIF)
The National Hospital Insurance Fund (NHIF) is a statutory body established under Cap 255 of Kenyan law.
Its primary purpose is to provide healthcare coverage for Kenyan residents through contributions and subsequent benefits payments. The contribution system is designed to be fair.
Salaried Employees are subject to a standard NHIF contribution deducted by their employers and remitted to the fund, while Self-Employed Individuals contribute to the NHIF based on their income levels.
Contributions for salaried employees are tiered based on income, with a minimum of Ksh 500 and a maximum of Ksh 1,700 for those earning Ksh 100,000 per month.
The Finance Act introduced 15% tax relief on insurance premiums and NHIF contributions in 2023. This relief is capped at Ksh 5,000 per month or Ksh 60,000 annually.
Statutory Contributions
3
National Social Security Fund (NSSF)
The NSSF Act of 2013 establishes a fund to manage contributions and benefits to provide social security for members and their dependents against various contingencies. Contributions are categorized as follows
Old Rate
Both employer and employee contribute Ksh 200 each, totalling Ksh 400.
Tier I
Set at 12% of the lower limit of Ksh 6,000, translating to Ksh 720, with equal contributions of Ksh 360 from both employer and employee
Tier II
Cumulative 12% of Ksh 18,000 (upper limit) is Ksh 2,160. Ksh 720 is taken as Tier I, and the remaining Ksh 1,440 is designated as Tier II.
Employers deduct these contributions from employees’ incomes and must file and remit them by the 15th of the following month.
Since the enactment of the NSSF Act No. 45 of 2013 in December 2013, there have been legal challenges regarding the new NSSF rates.
However, in February 2023, the Court of Appeal determined that the Employment and Labour Relations Court (ELRC) erred in declaring the Act illegal, as only the High Court has the authority to make such a ruling.
Consequently, the Act is now legal and enforceable.Under the Act, employees earning less than Ksh 6,000 have a lower earnings limit (LEL), while those earning Ksh 18,000 or more have an upper earnings limit (UEL).
Monthly matching contributions from both employees and employers have increased from the current Ksh 400 to 12% of an employee's monthly pensionable income (6% each from the employee and the employer).
With a maximum contribution of Ksh 2,160 for workers earning more than Ksh 18,000 per month.
Employee contributions are deducted directly from their salaries, and employer contributions are made directly by the employer.
Contributions below the low earning limits (up to a maximum of Ksh 720) are credited to a Tier I account.
In contrast, the remaining contributions for earnings between the LEL and UEL (up to a maximum of Ksh 1,440) are credited to a Tier II account.
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Statutory Contributions
4
National Industrial Training Authority (NITA)
Employers must pay the NITA levy annually, typically at a standard monthly rate of KShs 50 per employee, including casual workers, as Section 5 of the Industrial Training Act, Chapter 237 stipulated.
Employers are required to pay the training levy to the Commissioner-General when an employee’s salary is payable.
This payment must be remitted no later than the fifth day of the month after the levy becomes due.
The Kenya Revenue Authority (KRA) handles this payment through a unified payroll system.
The benefits of the NITA fund include
NITA covers the cost of training staff based on the terms and conditions of the levy.
Employers receive full or partial reimbursement for expenses incurred during employee training.
Compliance with legal requirements.
Statutory Contributions
5
Housing Levy
The proposed bill aims to deduct 3% from salaried employees' wages. Both employers and employees contribute to the National Housing Development Fund.
Conclusion
Statutory deductions in Kenya have proven helpful for government revenue generation.
These deductions contribute to economic growth and are used to invest in human capital, develop infrastructure, and promote social welfare.
They are essential to creating a sustainable and inclusive economic environment with numerous benefits for businesses and local employees.
Staying on top of your tax deductions in Kenya not only offers you social security but also gives you the satisfaction of actively contributing to the territory in which you have business operations.
Statutory regulations may change over time. Therefore, it’s advisable to stay updated or consult with an Africa payroll provider like Workforce Africa.
Schedule a consultation now and discover how you can leverage our payroll solution to enhance your organisation’s ability to grow and thrive.
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