Income Tax in Kenya

In Kenya, income tax is imposed on individuals and businesses based on income levels. Here are the key aspects of the income tax system in Kenya:

Individual Income Tax

Kenya uses a progressive tax system for individual income tax, meaning the tax rate increases with the level of income. As of the latest update, the tax rates for individuals are as follows:

• 0% for income up to KES 24,000 per month (KES 288,000 per year)
• 10% for income between KES 24,001 and KES 32,333 per month (KES 288,001 to KES 388,000 per year)
• 15% for income between KES 32,334 and KES 42,666 per month (KES 388,001 to KES 512,000 per year)
• 20% for income between KES 42,667 and KES 57,333 per month (KES 512,001 to KES 688,000 per year)
• 25% for income between KES 57,334 and KES 70,000 per month (KES 688,001 to KES 840,000 per year)
• 30% for income above KES 70,000 per month (KES 840,001 per year)

a. Corporate Income Tax

Corporate income tax in Kenya is imposed on the taxable income of companies and corporations operating in the country. Here are the key aspects:

Corporate Income Tax Rates

1. Resident Companies:
   • Standard Rate: 30%
   • Special Economic Zones (SEZ): 10% for the first ten years and 15% for the next ten years.
2. Non-Resident Companies:
   • Permanent Establishment: 37.5%

Taxable Income

Taxable income for corporations is calculated as the gross income minus allowable deductions. Gross income includes business profits, interest, dividends, rent, royalties, and other gains.

Allowable Deductions

Allowable deductions can include:

• Operational expenses
• Interest payments on business loans
• Depreciation of capital assets
• Contributions to registered retirement schemes
• Bad debts that have been written off

Tax Incentives

Kenya offers various tax incentives to encourage investment and economic growth, including:

• Export Processing Zones (EPZ): 10-year tax holiday followed by a 25% tax rate for the next 10 years.
• Special Economic Zones (SEZ): Reduced corporate tax rates and exemptions from certain taxes.
• Capital Deductions: Accelerated capital allowances on industrial buildings, machinery, and farm works.

Filing and Payment

Corporations are required to file annual tax returns with the Kenya Revenue Authority (KRA). The tax year runs from January 1 to December 31, but companies can apply for a different accounting period. Payment of corporate taxes is typically made in quarterly instalments based on estimated profits, with a final adjustment made when the annual return is filed.

Penalties

Penalties and interest are imposed for late filing or payment of taxes. Businesses must comply with tax regulations to avoid these additional costs.

For more detailed and specific information, consulting with a tax professional or visiting the KRA’s official website is recommended.

b. Value Added Tax(VAT)

Value Added Tax (VAT) in Kenya is a consumption tax levied on the sale of goods and services. The VAT system in Kenya is administered by the Kenya Revenue Authority (KRA). Here are the key aspects:

VAT Rates

• Standard Rate: 16%
• Zero Rate: 0% (applies to exports and certain goods and services)
• Exempt Supplies: Some goods and services are exempt from VAT, meaning VAT is not charged.

VAT Registration

• Businesses with an annual turnover of KES 5 million or more are required to register for VAT.
• Voluntary registration is allowed for businesses with a lower turnover.

Filing and Payment

• VAT returns must be filed monthly.
• VAT payments are also made on a monthly basis.
• The deadline for filing and payment is the 20th day of the following month.

Calculation of VAT

VAT is the difference between the VAT charged on sales (output VAT) and the VAT paid on purchases (input VAT).

Example:

1. Output VAT: If a business sells goods worth KES 100,000 at a 16% VAT rate, the output VAT is KES 16,000.
2. Input VAT: If the business purchased goods worth KES 50,000 and paid 16% VAT, the input VAT is KES 8,000.
3. VAT Payable: The VAT payable to the KRA is the output VAT minus the input VAT, which in this case is KES 16,000 – KES 8,000 = KES 8,000.

Exempt and Zero-Rated Supplies

• Exempt Supplies: Include financial services, education services, health services, residential rental income, and agricultural products.
• Zero-Rated Supplies: Include exports, certain medical supplies, and specific goods and services as defined by law.

VAT Refunds

Businesses can claim VAT refunds if their input VAT exceeds their output VAT, particularly if they deal with zero-rated supplies like exports.

Penalties

Penalties and interest are imposed for late filing or payment of VAT. Compliance is essential to avoid these additional costs.

VAT Invoices

Registered businesses are required to issue VAT invoices for all taxable sales, showing the VAT charged separately.

c. Pay As You Earn (PAYE)

Pay As You Earn (PAYE) is a method of collecting income tax from employees’ salaries and wages in Kenya. Employers are responsible for deducting tax from their employees’ pay and remitting it to the Kenya Revenue Authority (KRA). Here are the key aspects of PAYE in Kenya:

PAYE Tax Rates

PAYE is calculated using progressive tax rates, which means the tax rate increases as the income level rises. As of the latest update, the tax brackets for PAYE are:

• 0% for monthly income up to KES 24,000
• 10% for monthly income between KES 24,001 and KES 32,333
• 15% for monthly income between KES 32,334 and KES 42,666
• 20% for monthly income between KES 42,667 and KES 57,333
• 25% for monthly income between KES 57,334 and KES 70,000
• 30% for monthly income above KES 70,000

Personal Relief

Each employee is entitled to personal relief, which reduces the amount of tax payable. The current personal relief is KES 2,400 per month.

Calculation of PAYE

To calculate PAYE, the following steps are typically followed:

1. Determine Gross Pay: This includes the basic salary and any other taxable allowances or benefits.
2. Calculate Taxable Income: Subtract any allowable deductions (such as retirement contributions) from the gross pay.
3. Apply the Tax Rates: Use the progressive tax rates to determine the tax payable on the taxable income.
4. Subtract Personal Relief: Subtract the monthly personal relief from the tax payable to get the final PAYE amount.

Filing and Payment

• Employers are required to file PAYE returns and remit the deducted tax to the KRA on a monthly basis.
• The deadline for filing PAYE returns and payment is the 9th day of the following month.

Penalties

Penalties and interest are imposed for late filing or payment of PAYE. Employers must ensure compliance to avoid these additional costs.

PAYE Deductions

In addition to income tax, other statutory deductions may be made from employees’ salaries, including:

• National Social Security Fund (NSSF): A pension scheme to which both employers and employees contribute.
• National Hospital Insurance Fund (NHIF): A health insurance scheme to which employees contribute.

Example Calculation

Assume an employee has a monthly gross pay of KES 50,000 and no other allowances or benefits. Here’s how PAYE would be calculated:

1. Gross Pay: KES 50,000
2. Taxable Income: KES 50,000 (assuming no other deductions)
3. Apply Tax Rates:
   • 0% on the first KES 24,000 = KES 0
   • 10% on the next KES 8,333 = KES 833.30
   • 15% on the next KES 10,333 = KES 1,549.95
   • 20% on the next KES 14,667 = KES 2,933.40
   • Total PAYE before relief = KES 5,316.65
4. Subtract Personal Relief: KES 5,316.65 – KES 2,400 = KES 2,916.65

Therefore, the PAYE amount to be remitted for this employee would be KES 2,916.65.

d. Withholding Tax

Withholding tax in Kenya is a method of tax collection where the payer of certain types of income withholds or deducts tax at the source and remits it to the Kenya Revenue Authority (KRA). This system is designed to ensure tax compliance and efficient collection of taxes. Here are the key aspects of withholding tax in Kenya:

Withholding Tax Rates

The rates vary depending on the type of payment and the residency status of the recipient. Here are some common rates:

For Residents

• Dividends: 5%
• Interest (excluding interest from banks, insurance companies, and other financial institutions): 15%
• Royalties: 5%
• Management or Professional Fees: 5%
• Rent (excluding rent for residential property): 10%
• Commissions: 5%
• Pensions: 10%
• Consultancy Fees: 5%
• Contractual Fees: 3% (for payments exceeding KES 24,000 per month)

For Non-Residents

• Dividends: 15%
• Interest: 15%
• Royalties: 20%
• Management or Professional Fees: 20%
• Rent (excluding rent for residential property): 30%
• Commissions: 20%
• Consultancy Fees: 20%
• Contractual Fees: 20%

Scope of Withholding Tax

Withholding tax applies to various types of income, including:

• Dividends
• Interest
• Royalties
• Management and professional fees
• Consultancy fees
• Contractual fees
• Rent (for business premises)
• Commissions

Filing and Payment

• Monthly Filing: Withholding tax returns must be filed on a monthly basis.
• Payment Deadline: The tax withheld must be remitted to the KRA by the 20th day of the following month.
• Certificate: The withholding agent must issue a withholding tax certificate to the payee, detailing the amount withheld and remitted.

Exemptions and Double Taxation Agreements (DTAs)

• Certain payments may be exempt from withholding tax under Kenyan tax laws or specific exemptions granted by the KRA.
• Kenya has entered into Double Taxation Agreements (DTAs) with various countries, which can provide for reduced withholding tax rates or exemptions. It’s important to refer to these agreements to determine the applicable tax rate.

Penalties

Penalties and interest are imposed for late filing or payment of withholding tax. Compliance is essential to avoid these additional costs.

Example Calculation

Assume a resident consultant provides services and receives a payment of KES 100,000. The withholding tax rate for consultancy fees for residents is 5%.

1. Gross Payment: KES 100,000
2. Withholding Tax: 5% of KES 100,000 = KES 5,000
3. Net Payment to Consultant: KES 100,000 – KES 5,000 = KES 95,000

The withholding agent (payer) will remit KES 5,000 to the KRA and provide the consultant with a withholding tax certificate for the amount withheld.

For more detailed and specific information on withholding tax in Kenya, consulting the KRA’s official website or a tax professional is recommended.