Kenya needs to enhance tax deductions on new NSSF contributions

NAIROBI, KENYA: On June 1, Kenyans woke up to the reality that their pension contributions to National Social Security Fund (NSSF) this month will be increased from Sh200 a month to 6 per cent of their total monthly income. This is subject to a set upper limit.

In the first year of implementation, 6 per cent NSSF contribution will be capped at Sh1,080 but the amount is expected to increase significantly over the next five years. The employer will be required to match employee contributions to the NSSF. The enhanced pension contributions are welcome especially in light of high inflation that has continued to erode real value of benefits received from NSSF, which means an employee’s retirement package is dealt a significant blow, and therefore the need to protect our people upon retirement.

However, given tough economic times facing the country thanks to increased insecurity, high interest rates, political squabbling among other factors, it is expected the steep jump in NSSF contributions will aggravate a delicate situation in Kenyans pockets.

It would therefore be welcome for the Government to provide soft-landing by enhancing tax deductions in respect of increased NSSF contributions and considering that employees will continue contributing to their private pension schemes too. This action would also be perfectly in line with the Jubilee government’s manifesto ‘to use tax system to provide incentives to people to save for their old age.’

EXCEEDS THRESHOLD

The current Income Tax Act provides for a maximum deduction of Sh20,000 per month in arriving at taxable income. The amount is shared between employee and employer but the employee ranks first in claiming the deduction. If an employee exhausts this amount, too bad for the employer – he/she (employer) does not get a tax deduction in respect of their contribution to the employee’s pension. It is also disappointing to note that in arriving at the tax deductible threshold of Sh20,000, both contributions to NSSF and private pension schemes are taken into account. To add salt to injury, this threshold has not been revised for close to a decade now. This means, given high inflation and changing economic times, the tax threshold is too low and therefore the incentive does not encourage our people to save anything more than what is required by law or private pension trust deeds.

It would be worthwhile if the Government could increase tax deductible pension contribution to say, Sh40,000 and adjust this threshold upwards as the NSSF adjusts their contributions in the coming years.  Alternatively, the threshold could be set flexible to provide greater tax incentive for people willing to save more. In addition, a certain proportion should also be created for employers where an employee’s contribution exceeds the threshold to promote equity and fairness. This would nurture a better saving culture among Kenyans as they confidently prepare for old age and contribute to economic growth and development in the greater scale of matters. This means the Government would be achieving other objectives as it works towards honouring the Constitution and Social Protection Policy adopted by the Cabinet which guarantees access to social security for all Kenyans.

On budget day, Treasury promised to harmonise the NSSF Act. The Government also directed that the period for remittance of NSSF contributions reduced from 30 to 10 days and preparation of fund accounts from six to three months in line with the provisions of the Retirement Benefits Act. 

To get a comprehensive picture of the extent of changes in regulations, we wait to see what happens when the Finance Bill is presented to Parliament for approval.

—Mutwiri is a senior tax manager, Deloitte East Africa. The views expressed here are not necessarily those of Deloitte