How New taxes will Degenerate Your Payslip
Payday is always fun.
New taxes lower Kenyans’ take-home income at the end of this month, causing anxiety, dissatisfaction, and even anger.
Kenyans in formal employment are projected to face lower pay due to recent tax initiatives, such as the controversial affordable housing levy that took effect on July 1 and took 1.5 percent of their gross earnings.
In September, high-income earners between Sh500,000 and Sh800,000 would pay 32.5 percent pay-as-you-earn (PAYE) instead of 30 percent.
Over-Sh800,000 earners pay 35% tax.
The government must wait longer to enact the Finance Act of 2023. The High Court prolonged interim orders preventing the State from adopting new taxes until July 10, when it will rule on the suspension.
Despite the court decision, President William Ruto signed the Bill on June 26 and raised fuel prices.
Busia Senator Okiyah Omtata opposed the Finance Act’s implementation on the grounds that the Senate did not pass the controversial statute.
The anticipated NHIF rate hike to 2.75 percent of pay also prevents greater deductions. Employers match NHIF contributions 2.75 percent.
The highest NHIF rate is Sh1,700 per month for persons earning over Sh100,000. In 2021, workers and employers paid Sh700 monthly.
The housing levy reduces take-home pay by Sh1,350 for an employee earning Sh90,000.
NHIF rates will rise to Sh2,475 per month from Sh1,200 for such an employee if adopted.
High-income earners will get Sh34,994 in additional deductions.
NHIF deductions would rise to Sh22,825 from Sh1,700, while the housing levy will be Sh12,450. Analysts said Kenyans may feel overtaxed because the new taxes are being levied on the same people, but more should be done to broaden the tax base.
Finance Act 2023 effects
“The 1.5 percent housing levy targets the same people,” said Cliffe Dekker Hofmeyr (CDH) Partner Alex Kanyi.
“There are a lot of people in the informal sector who are not paying their fair share of taxes and the government could invest in ensuring that they come to the tax net as opposed to taxing the people who are already in the tax net more.”
“As opposed to taxing the group of about three million employees who rely on salaries and government gets the PAYE, why not think about other populations of Kenyan adults who may not be paying taxes,” he says.
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The state raised NSSF rates, which are also shared by employees and employers, months before raising NHIF rates.
Sh200 NSSF rates rose to Sh1,080.
The employer matches the monthly contribution to Sh2,160.
Mr. Kanyi remarked that the Act had protected employers from the housing levy.
How New taxes will Degenerate Your Payslip
The Act allows employers to deduct employee payments. “At the end of the year, the employer will take what they contributed on behalf of the employee as an expense, reducing their tax liability,” he said.
How New taxes will Degenerate Your Payslip
Cash flow
Thus, he argued, could cushion the employer but threaten their financial flow.
The housing levy is due on the 9th of the next month, along with PAYE and other work taxes.
“This means an employer will pay the levy every month and only get the deduction at the end of the year,” he said.
The employer will still lose money because this money would have gone elsewhere. it could have funded more jobs, production, or trade.”
The initial amount was 3% of an employee’s base pay, which was matched by their company.
Employee and employer contributions were capped at Sh2,500 per month, totaling Sh5,000.
Despite public disapproval, the Act kept the levy. As a levy, it replaced a donation. It was cut to 1.5 percent for employers and employees but is now uncapped.
Labour costs
To control excessive labour costs, employers cautioned that this could slow job development and perhaps lead to layoffs.
“The Housing Levy will raise payroll costs by 1.5 percent and reduce employee take-home pay. The Federation of Kenya Employers (FKE) informed The Standard this week that workers will demand salary increases.
“We hope the housing development programme will be well implemented so that the economy benefits from jobs, improved manufacturing, and money circulation.”
The employers’ group warned that the Finance Act will raise corporate running costs, which could lead to automation, outsourcing, and casualization and enormous job losses.
FKE stated this could reduce formal wage employment in Kenya.
“FKE has engaged the government on various provisions in the Finance Bill 2023, now an ACT, to ensure we get win-win policy directives. We embrace social dialogue and hope to continue until we have a corporate environment that encourages entrepreneurship growth to produce jobs and riches for our nation.”
