Employment Tax

Kenya | Highlights of recent amendments to Tax Laws and Tax Procedures

Summary

The Tax Laws (Amendment) Act, 2024 (‘’TLAA’’) and The Tax Procedures (Amendment) Act, 2024 (‘’TPAA’’) were assented into law by the president on 11th December 2024. The Acts introduce several amendments to the Kenya tax legislation namely: The Income Tax Act, The Valued Added Tax Act, The Tax Procedures Act, The Excise Duty Act and The Miscellaneous Fees and Levies Act.

This bulletin provides a high-level employment tax amendments analysis and their potential implications on employers and employees in Kenya.

Worth noting that the amendments herein took effect from 27th December 2024.

The detail

Non-cash benefits aggregate value adjustments

Non-cash benefits
The TLAA amends Section 5(2)(b) of the Income Tax Act to increase the non-cash benefits tax-exempt threshold from KES 36,000 per annum to KES 60,000 per annum. This means that KES 60,000 per annum (KES 5,000 per month) employment non-cash benefits conferred to employees will be tax free.

Meals to employees
The TLAA also amends Section 5(4)(f) of the Income Tax Act to increase the tax-free meals amount threshold provided to employees by employers from KES 48,000 per annum to KES 60,000 per annum.

Implications: This is a highly welcome gesture because tax-free amounts have remained unchanged over the years and not being in tandem with the significant fluctuations in the economy. This will somewhat cushion the low-income earners from the harsh economic landscape and the runaway cost of living.

Retirement benefits and pension contributions

Increased threshold for allowable pension contributions

The TLAA amends Section 22A of the Income Tax Act to increase the tax-deductible amount from 240,000 per annum (KES 20,000 per month) to KES 360,000 per annum (KES 30,000 per month) against an employees’ taxable income. This deduction is only applicable pension contributions to a registered pension scheme.

Implications: This new provision increases the amount being saved towards retirement and slightly increases the employees’ disposable income since it is a direct deduction from taxable employment income

Tax exemption for pension benefits

The TLAA now grants tax exemption on pension benefits pay-out to retirees subject to specified rules of respective individual registered retirement pension scheme/provident fund and National Social Security Fund.

The TLAA tax exemption applies to:

• Pay-out of gratuity or other allowances made under a public pension scheme.
• Pay-out of a retirement annuity made.
• Early retirement benefit withdrawal from the fund before attaining the retirement age. This provision is only applicable due to ill health or after twenty years of membership since registration with the fund.

Implications: Increasing the allowable deductions threshold on pension contributions and extends the pension benefits tax fee amount and exemption. This will foster a saving culture and at the same time it incentivizes both employers and employees to actively participate in pension schemes and provided funds savings.

Definition of individual retirement fund, provident and pension funds
The TLAA further amends the Section 2 of the Income Tax Act on definition of individual retirement fund by deleting the registration with the Commissioner of Income Tax requirement.

The TLAA introduces new definitions of “registered individual retirement fund”, “registered pension fund” and “registered provident fund” to now mean “funds registered with the Retirement Benefits Authority” (RBA).

Social Health Insurance, Housing Levy, and Post retirement Medical Fund

Deductibility of Social Health Insurance, Post Retirement Medical Fund and Housing Levy contributions

The TLAA now introduces allowable deductions under Section 15(2) of the Income Tax Act including:

• Where an employee contributes to Affordable Housing in accordance with Section 5(1)(a) of the Affordable Housing Act, 2024.
• Where an employee contributes to a post-retirement medical fund subject to a limit of fifteen thousand shillings per month
• Where an employee contributes to the Social Health Insurance Fund in accordance with Section 27(a) and (b) of the Social Health Insurance Act, 2023

Implications: The deductibility of the contributions mentioned above will some worth reduce employees’ tax base. This will effectively lead to a reduction in the pay as you earn (PAYE) payable by employees and, ultimately increasing employees’ net pay take home.

Scrapping of the post-retirement medical relief and Affordable Housing Relief

The TLAA has subsequently scrapped tax relief towards Affordable Housing and post-retirement medical by repealing Section 30A and 31A respectively.

Increased mortgage interest deductions

The TLAA also amends Section 15(3)(b) of the Income Tax Act to increase the mortgage interest payable threshold on loans from approved and registered financial institutions from KES 300,000 per annum to KES 360,000 per annum. This will apply to loans taken for the purpose of purchasing or improving of a house used for residential purposes.

Implications: This amendment seeks to encourage home ownership by easing the financial burden associated with mortgage interest.

Extension of Tax Amnesty

The Tax Procedures (Amendment) Act, 2024 (‘’TPAA’’) extends the tax amnesty deadline to 30 June 2025. The TPAA further revises the period covered by the tax amnesty to include the periods prior to 31 December 2023.

Implications: Under this amendment, taxpayers who had not paid their principal taxes due before 31 December 2023 can settle these taxes without accruing any penalties or interest if paid by 30 June 2025.

Contact us

For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:

Andrew Ondieki
Director

Kennedy Kyalo
Senior Manager

Martin Wambugu
Manager

Ritah Lihavi
Associate

 

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