How to outsmart the taxman

By Tania Ngima

As with every year, the last week in June heralds the mad dash to get annual returns out, be it for individuals, companies or other business entities.

A few people were hoping that the tax brackets would be adjusted to put a little more money in our pockets, but the budget held no such luck.

If like me after you filled in the box where you declare how much income tax you paid during the year you went into a tizzy thinking of just how many things you could have done with that money, then a little simple tax planning is the thing to do.

Non-cash benefits

Given the option between getting say, Sh20,000 in cash as an end of year bonus and receiving a non-cash gift, such as a television or holiday worth the same amount, most people would prefer the cash.

However, non-cash benefits, as long as they do not exceed, Sh30,000 for the whole year are not subject to tax.

Simply put, a gift given in cash affects your pay slip and increases the amount of tax payable; if you’re in the 30 per cent tax bracket, then you forfeit 30 per cent of the bonus.

Other non-cash benefits that should not be taxed on the employee include use of a company car, as long as this is subject to a limit and education of staff as long as this is directly related to their career.

Interest and relief

In addition to the relief of Sh1,162 a month granted by Kenya Revenue Authority, payments made to a registered retirement or pension scheme have the same effect on the pay slip — they both reduce the taxable income, the latter to a maximum of Sh20,000 a month.

If you have a mortgage and are occupying the house, the portion of your repayment that is interest charges is allowable as a deduction of up to Sh12,500 a month or Sh150,000 per year.

In the same way, the Income Tax Act provides for deductions of Sh4,000 a month allowable to members of home ownership savings plans and 15 per cent of the premiums paid on life insurance up to a maximum of Sh60,000.

It is important to note that donations given to charities which have tax exemption certificates are tax deductible, both for individuals and businesses.

Stock options and investing

Some employers have taken rewarding their staff a step further and introduced stock options.

These are an incentive given to employees in form of shares — ownership of part of the company at a specific price — usually lower than the market value.

An organisation could opt to give staff the option of taking stocks or shares instead of cash in which case they are exempt from tax until the holder decides to sell them, hopefully at a high enough price to yield a profit.

Certain securities and immovable properties are not subject to taxes upon their disposal. It’s important to explore these when making investments as an added element of tax planning.