Payslips for salaried workers could get even smaller if a Treasury proposal to end relief from pay-as-you-earn (PAYE) taxes is approved.
The Treasury intends to evaluate the current tax reliefs on employment earnings to maximize collections under its recently released medium-term revenue strategy.
“Although tax incentives give governments a tool to change the behavior of taxpayers, they come at a price in the form of lost tax income. Tax incentives also make the tax system more complicated and make it less efficient as a tool for promoting equity. According to studies, incentives may not always be successful in changing the behavior of taxpayers, the Treasury stated.
Paid employees currently have access to two different types of tax relief through PAYE, including a Sh2,400 monthly personal relief for all residents that lessens the tax burden on the taxpayer.
Salary employees who have paid insurance premiums for life, health, or education policies for themselves, spouses, or children are also eligible for a 15 percent tax break, up to a maximum of Sh60,000 per year.
To qualify for the tax benefit, the education and health policies must, however, be at least ten years old.
Contributions to the National Hospital Insurance Fund (NHIF) were also eligible for insurance relief as of January of last year.
Tax experts, believe the Treasury’s proposal to eliminate some or all of the tax reliefs would only hurt households’ disposable income at a time when they are already adjusting to the recently implemented housing levy of 1.5 percent of gross salaries and higher National Social Security Fund deductions, are perplexed by the Treasury’s proposal.
“How you tax households is crucial because it affects their ability to spend money. This would have an impact on business earnings and sales, and ultimately on GDP. The salaried workforce, or what I like to call the middle class, is what drives the economy, according to Francis Kamau, Partner and Tax Leader at Ernst & Young.
Nevertheless, the National Treasury has proposed mitigating measures, such as introducing a new PAYE tax band at zero percent, to counteract the reduction of the tax reliefs.
“With the removal of personal relief, low-income tax earners will be cushioned in line with the adjusted tax bands by creating a zero-rate tax band,” the exchequer continued.
To reduce options for tax avoidance and evasion, the government is also considering cushioning top incomes by lowering the top PAYE tax rate from the recently set ceiling of 35 percent to 25 percent.
Three months have passed since the 2023 Finance Act imposed two new tax brackets, with rates of 32.5 percent and 35 percent, respectively, on monthly employment income above Sh500,000 and Sh800,000.
The new PAYE bands were thought to be unsuccessful at increasing exchequer earnings from work income.
Given that the majority of Kenyan employees make less than Sh100,000 per month, the predicted gain in revenue might be insignificant, according to tax specialists at KPMG.
Due to the personal relief of Sh2,400, which equates to the 10% rate of tax on the lowest tax band, employees with wages up to Sh24,000 per month are currently exempt from PAYE taxes.
PayE taxes are levied at rates of 25 and 30 percent for the remaining salaried personnel.
