The high taxes have been on the lips of many a Kenyan, wondering how to survive the taxman’s onslaught. Dennis Mutunga, a tax consultant explain the simple ways you can minimise the burden.
1. Take a mortgage instead of a loan
A mortgage is an agreement with a financial institution that allows you to borrow money to purchase property. With this, you can get mortgage relief, where the law allows you to claim a tax relief of up to Sh25,000 per month or Sh300,000 per annum. If you plan to buy property, it is important to take a mortgage rather than an ordinary loan because an ordinary loan has no tax relief.
2. Invest in a tax-free environment
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There are tax-free environments where you can invest your money. A good example is a bank like the Kenya Post Office Savings Bank (PostBank), where interest income from your fixed deposits is tax exempted. This is because PostBank is regulated by the Kenya Post Office Savings Bank Act Cap 493B, while other commercial banks in Kenya are licensed and regulated by the Central Bank of Kenya.
3. Take insurance cover
Life insurance is a way to help protect loved ones financially in the event of your death. A group life insurance and other insurance covers like an education policy (with a maturity date of more than 10 years) qualifies for insurance relief. The premiums paid will qualify for relief allowed up to a maximum of Sh5,000 per month or Sh60,000 per annum. The payouts on maturity of the insurance are also not subjected to capital gains tax. These insurance policy plans reduce the amount of tax you are to pay.
4. Register with a retirement benefits scheme
Other than the National Social Security Fund (NSSF) which is mandatory for salaried employees, there are other registered schemes to which you can apply to be a member. Savings with these schemes of up to a maximum of Sh20,000 per month or Sh240,000 per year are not subject to tax. It makes sense to save in a retirement scheme rather than in a regular savings account, because in addition to not getting taxed, these schemes also offer returns on your savings of between four to seven per cent every year.
5. Contribute to a registered home ownership savings plan
This is a plan where the government has an agenda to enable you own your own home. With such a plan, you dedicate a portion of your income monthly and contributions of up to sh4,000 per month or Sh48,000 per year are not taxed. In addition, interest earned from the deposits you make, of up to Sh3 million are tax exempted.
6. Get disability relief
Persons with disabilities are assessed by a government medical institution and upon assessment report; the National Council of Persons with Disabilities registers the person. If you are a person with disability, by virtue of this registration, you can apply for an exemption certificate at the Kenya Revenue Authority (KRA). Persons with disabilities are exempted from tax on their taxable income of up to Sh1.8 million per year, which is Sh150,000 per month. Therefore, if you are in business or employment and do not have an exemption certificate, you are losing out on huge savings.
7. Avoid fines and penalties
Failure to pay taxes or file tax returns is expensive. The law requires that all persons, including companies, submit their returns to the Commissioner of Domestic Taxes within six months after the end of the accounting period, or by 30th June of each year for individuals. Non–compliance will result in penalties being charged which may include fines and/or imprisonment. Omitting any amount of income that should have been included in your return of income attracts a penalty equal to double the difference between the tax chargeable and the normal tax. If you file a return of income after due date, you will incur additional tax equal to five per cent of the normal tax or Sh20,000 for individuals, whichever is higher, and that is charged every 12 months. Interest on unpaid tax is calculated at the rate of two per cent a month on any unpaid amount, including the penalty, one month after the due date.
8. Register your business
Many people fail to register side hustles but this tends to work to their detriment in the long run as failing to do this is illegal. When you register your business, you are able to document all your expenditure, and therefore you can claim taxes on the business. All expenses legitimately incurred in the production of this income are tax deductible.