Pay As You Earn (PAYE) is a method of tax collection on income earned by employees in Kenya. Administered by the Kenya Revenue Authority (KRA), PAYE is a key component of the country’s taxation system, ensuring that income tax is deducted from an employee’s salary or wages by their employer and remitted directly to the government. This essay will provide a comprehensive overview of PAYE in Kenya, including its definition, how it is calculated, the obligations of employers and employees, and its significance within the broader tax system.
Definition of PAYE
PAYE is a system where employers deduct income tax from their employees’ salaries or wages at source. The deducted tax is then submitted to the Kenya Revenue Authority on behalf of the employees. This system ensures that taxes are collected regularly and systematically, aligning with the employees’ earnings period, whether it is monthly, weekly, or bi-weekly.
Calculation of PAYE
The calculation of PAYE in Kenya involves determining the taxable income and applying the relevant tax rates. The taxable income is the gross income of an employee minus allowable deductions and exemptions. Here’s a step-by-step breakdown of the calculation:
- Gross Income: This includes basic salary, bonuses, commissions, allowances, and any other earnings.
- Allowable Deductions: These include contributions to registered pension schemes, mortgage interest, and insurance reliefs.
- Taxable Income: This is calculated by subtracting allowable deductions from the gross income.
Tax Rates
As of 2023, the Kenyan PAYE tax rates are progressive, meaning they increase with higher income levels. The rates are as follows:
- Up to Ksh 24,000: 10%
- Ksh 24,001 – Ksh 32,333: 15%
- Ksh 32,334 – Ksh 48,000: 20%
- Ksh 48,001 – Ksh 64,000: 25%
- Above Ksh 64,000: 30%
Example Calculation
Let’s consider an employee with the following monthly earnings:
- Basic Salary: Ksh 50,000
- Housing Allowance: Ksh 10,000
- Medical Allowance: Ksh 5,000
Total Gross Income: Ksh 65,000
Assuming the employee has a monthly pension contribution of Ksh 5,000 (an allowable deduction):
- Taxable Income: Ksh 65,000 – Ksh 5,000 = Ksh 60,000
Applying the progressive tax rates:
- First Ksh 24,000: 10% of 24,000 = Ksh 2,400
- Next Ksh 8,333 (24,001 – 32,333): 15% of 8,333 = Ksh 1,250
- Next Ksh 15,667 (32,334 – 48,000): 20% of 15,667 = Ksh 3,133
- Remaining Ksh 12,000 (48,001 – 60,000): 25% of 12,000 = Ksh 3,000
Total PAYE: Ksh 2,400 + Ksh 1,250 + Ksh 3,133 + Ksh 3,000 = Ksh 9,783
Thus, the employee’s net income after PAYE would be Ksh 60,000 – Ksh 9,783 = Ksh 50,217.
Also read: 7 things you need to know about Fixed Deposit Accounts in Kenya
Employer and Employee Obligations
Employer Obligations
- Deduction: Employers are required to deduct the appropriate amount of PAYE from their employees’ salaries.
- Remittance: The deducted tax must be remitted to the KRA by the 9th of the following month.
- Record Keeping: Employers must maintain accurate records of all payments and deductions for at least five years.
- Issuing Payslips: Employers must provide employees with payslips detailing gross pay, deductions, and net pay.
- Annual Returns: Employers must submit an annual PAYE return to the KRA, summarizing the total PAYE deducted and remitted for each employee.
Employee Obligations
- Providing Accurate Information: Employees must provide their employers with accurate personal and financial information to ensure correct PAYE deductions.
- Reviewing Payslips: Employees should review their payslips to ensure that PAYE deductions are correctly calculated and remitted.
- Annual Tax Returns: Employees may need to file annual tax returns to report any additional income and claim tax reliefs or refunds.
Significance of PAYE
Revenue Collection
PAYE is a significant source of revenue for the Kenyan government. It ensures a steady and predictable flow of funds that can be used for public services such as healthcare, education, infrastructure development, and security.
Compliance and Convenience
PAYE simplifies tax compliance for employees by automating the tax deduction process. Employees do not have to worry about making periodic tax payments, as this responsibility is transferred to the employer.
Fairness and Equity
The progressive nature of PAYE promotes fairness and equity in the tax system. Higher earners pay a larger proportion of their income in taxes, which helps in wealth redistribution and reducing income inequality.
Administrative Efficiency
For the KRA, PAYE is an efficient way to collect taxes, reducing the administrative burden associated with tracking and collecting individual tax payments. It also minimizes the risk of tax evasion and improves overall tax compliance.
Conclusion
Pay As You Earn (PAYE) is a critical component of Kenya’s tax system, facilitating the systematic collection of income tax from employees. By understanding how PAYE is calculated, the obligations of both employers and employees, and its broader significance, individuals and businesses can better navigate the tax landscape. PAYE not only ensures regular revenue collection for the government but also simplifies tax compliance, promotes fairness, and enhances administrative efficiency. As such, it is a cornerstone of fiscal policy and public finance management in Kenya.