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KRA Announces Major Overhaul Of PAYE Computation: What Employees And Employers Need To Know

BY Soko Directory Team · December 19, 2024 03:12 pm

KEY POINTS

For employees, the changes present opportunities to maximize deductions and exemptions, thereby reducing their taxable income. However, understanding these provisions requires a comprehensive financial literacy approach, as failing to optimize the benefits could result in higher-than-necessary tax payments.

The Kenya Revenue Authority (KRA) has announced critical amendments to the Pay-As-You-Earn (PAYE) computation under the Tax Laws (Amendment) Act, 2024. These changes, effective from December 27, 2024, are poised to reshape the tax obligations of employees and employers across the country. The modifications reflect the government’s shifting priorities, particularly in housing, health insurance, and retirement planning.

Under the new guidelines, several amounts will be deductible when determining taxable employment income. Key among these is the Affordable Housing Levy introduced under the Affordable Housing Act, 2024. This levy aims to boost the government’s housing agenda but shifts the financial burden directly to employees and employers. For employees, this deduction reduces their taxable income, but employers must carefully analyze how this affects overall payroll costs.

Additionally, contributions to a post-retirement medical fund, capped at Kshs. 15,000 per month, are now deductible. This change encourages employees to secure medical cover for their retirement years, addressing long-term health vulnerabilities. Employers may need to educate employees about the benefits of this provision, especially in the context of rising healthcare costs in retirement.

Another notable inclusion is the deduction of contributions to the Social Health Insurance Fund (SHIF). This provision aligns with the government’s effort to strengthen universal healthcare coverage. While it reduces the taxable income of employees, the challenge lies in the transparency and efficiency of SHIF, as public trust in national insurance schemes remains shaky.

Mortgage interest deductions have also been expanded, with a cap of Kshs. 360,000 per year (Kshs. 30,000 per month). This provision benefits employees borrowing from designated financial institutions for residential property improvement or purchase. Employees planning to invest in homeownership should seize this opportunity, as it not only reduces taxable income but also provides a pathway to owning homes.

However, with these additions come significant eliminations. The Affordable Housing Relief and Post-Retirement Medical Fund Relief are no longer applicable. Their removal raises concerns about whether the government is inadvertently increasing the tax burden on employees, despite introducing similar relief mechanisms under different names. Employers may need to navigate potential discontent among employees by clarifying these changes.

The notice also redefines gains and profits from employment, offering tax-exempt thresholds. For instance, benefits such as meals valued at Kshs. 5,000 per month and gratuity payments up to Kshs. 360,000 for service years paid into registered pension schemes are excluded from taxable income. These exclusions provide some financial relief but demand meticulous record-keeping by employers to ensure compliance.

From an employer’s perspective, the revised PAYE structure necessitates a review of payroll systems to accommodate these new deductions and exemptions. The adjustments could mean increased administrative work to ensure accurate tax calculations and compliance with KRA regulations. Non-compliance risks penalties that could harm the financial standing of businesses.

Overall, the amendments to PAYE computation illustrate the government’s intent to align taxation with broader social and economic goals. Employees and employers alike must remain vigilant, adapt to these changes, and seek clarity when needed to avoid non-compliance. The onus is now on all stakeholders to ensure smooth implementation of the new provisions while fostering financial awareness and preparedness.

About Soko Directory Team

Soko Directory is a Financial and Markets digital portal that tracks brands, listed firms on the NSE, SMEs and trend setters in the markets eco-system. Find us on Facebook: facebook.com/SokoDirectory and on Twitter: twitter.com/SokoDirectory

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