Employment Tax
Kenya | Finance Bill 2024 highlights
Summary
The Finance Bill, 2024 (“the Bill”) was tabled before the National assembly on 9th May 2024. The Bill proposes several amendments to the current Kenya tax legislation including The Income Tax Act, The Valued Added Tax Act, The Tax Procedures Act, The Excise Duty Act and The Miscellaneous Fees and Levies Act. The Bill primarily focuses on the expansion of the tax base with aiming to increasing revenue collection.
The proposed employment tax legislation amendments target to align employee reimbursements with the current economic realities such as increasing the per diem and non-cash benefits thresholds. Additionally, the Bill tries to address issues surrounding the newly introduced Social Health Insurance Fund (SHIF) and highly contested Affordable Housing Levy.
This bulletin provides a high-level analysis to the employment tax proposal changes and their potential implications on employers and employees in Kenya. Should the Bill be passed into law in its current form, the proposals herein will take effect from 1 July 2024
The detail
Per diem and prescribed non-cash benefits aggregate value adjustments
Per diem
Currently the first KES 2,000 per day, paid to an employee working out of station to cater for subsistence, travelling, entertainment or other out of pocket expenses. This only relates to a period an employee spends outside the usual workplace while on official duties is deemed reimbursable and not subject to tax.
The Bill proposes to increase the tax-free threshold from KES 2,000 to a maximum of 5% of the employee’s monthly gross earnings. Accordingly, employers are now required to put in place a Per Diem policy to govern the payment and accounting of such expenses.
Non-cash benefits
Section 5 (b) of the Income Tax Act provides that the value of non-prescribed benefit, advantage, or facility of whatsoever nature whose aggregate value is greater than KES 36,000 per annum is subject to tax. The Bill seeks to increase this threshold to KES 48,000 per annum. This therefore means that any non-cash benefits conferred to employees in the course of their employment will be non-taxable up to KES 48,000 per annum (KES 4,000 per month).
However, it is important to note that the above excludes any prescribed non-cash benefits whose taxability is specifically provided for in the Kenya tax legislation.
Meals to employees
The Bill proposes to increase the non-taxable threshold for meals provided by employers to employees from the current KES 48,000 per annum to KES 60,0000 per annum.
Implications of the revised thresholds: The above non-taxable amounts have remained unchanged for a prolonged period, despite significant fluctuations in the economy over the years. These proposals are highly welcome as they try to cushion employees from the evolving harsh economic landscape, particularly the rising inflation. Moreover, it will also incentivize employers to provide these benefits to their employees.
Retirement benefits and pension contributions
Increased threshold for allowable pension contributions
Section 16 (22)(a) of the Income Tax Act currently provides for tax deductible benefit amount of up to KES 240,000 per annum (KES 20,000 per month) against the taxable income in respect an employee’s pension contributions to a registered pension scheme. The Bill proposes to increase the tax-deductible amount to KES 360,000 per annum (KES 30,000 per month)
Tax exemption for pension benefits.
Currently, the Income Tax Act provides for an exemption from tax the monthly or lumpsum pension benefits payout to an individual who has attained the age of 65 years and over (senior citizen). The Bill seeks to extend the exemption from tax, the pension benefits payments to individuals who retire upon the attainment of the retirement age as may be determined and in accordance with the fund’s rules and regulations. The Bill further proposes a tax exemption of pension benefit payments to individuals who retire before attaining the retirement age due to ill health or who withdraw from the fund after twenty years from the date of registration as members of the fund.
Implications of the proposed retirement benefit changes: Increasing the threshold for allowable deductions on pension contributions as well as extending the pension benefits tax exemption threshold aims to incentivize participation in registered pension schemes by both employers and employees, thereby fostering a culture of saving. If enacted, this proposal would likely result in a higher number of employers and employees making pension contributions, supplementing the standard mandatory contributions to the National Social Security Fund
Social Health Insurance, Housing Levy and Post retirement Medical Fund
Deductibility of Social Health Insurance contributions
The Bill proposes a tax deductible of contributions made to the recently introduced Social Health Insurance Fund (SHIF) against the monthly taxable income. The Bill also proposes to delete the tax relief granted under the current NHIF Act. For clarity, the SHIF will take effect from 1st July 2024 and replace the current National Hospital Insurance Fund (NHIF).
Scrapping of the post-retirement medical relief
The Income Tax Act currently provides for a 15% tax relief on contributions made to a post-retirement medical fund of up to KES 60,000 per annum. The Bill proposes to delete the 15% tax relief against such contributions and introduces a tax-deductible amount of up to KES 120,000 per annum (10,000 per month) of the post- retirement medical fund contributions against the taxable income.
Scrapping of Affordable Housing relief.
Section 30A of the Income Tax Act provides for 15% tax relief but capped to a maximum of KES 108,000 per annum on affordable housing to qualifying resident individuals. The bill proposes to repeal this section and make the Affordable Housing Levy (AHL) contributions an allowable deduction against the individual’s taxable income.
Implications of the proposed changes: The deductibility of the contributions mentioned above will effectively reduce the tax base for employees making these contributions. This will consequently reduce the net tax payable by individuals who are currently facing the strain of heightened taxes and high cost of living in the country. While these measures are greatly welcome, it is currently a “wait and see” situation for the by-product of the Bill after National Assembly’s debate on whether it will improve contributions to post-retirement medical funds and potentially improve the citizens’ perceptions around the contentious AHL and SHIF contributions.
Contact us
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
Andrew Ondieki
Director
Mercy Migwi
Senior Associate
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Associate
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