Ogden Nash, the late American poet said in his One From One Leaves Two poem: “The more you pay, the more they need. The more you earn, the less you keep. And now I lay me down to sleep. I pray the Lord my soul to take, if the tax collector hasn’t got it before I wake.”
However, there are legal methods of minimising your taxable income and eventually your tax liability without getting into the bad books of the taxman (Kenya Revenue Authority). Call it tax planning or simply making use of all beneficial provisions in the law to your benefit. Here’s how.
1. Contributions to a registered Home Ownership Savings Plan (HOSP)
The government wants you to have your own shelter. And so it has a way of encouraging the many taxpayers who still shelter under somebody else’s roof - including that of the landlord - can do so.
Committing part of your salary to save in a registered HOSP is advantageous, you will eventually have your own roof and you will have reduced your tax burden. The Income Tax Act provides that contributions up to Sh48,000 a year be exempted from tax.
In addition, interest earned on deposits of up to Sh3 million in such a scheme are tax free. In short, for someone saving Sh4,000 in HOSP, it will take you at least 63 years to accumulate an amount of money that KRA will be interested in taxing.
2. Take mortgage for your residential premises as opposed to ordinary loan
If you have a dream of purchasing a home or improving the premises you occupy for residential purposes, you are eligible to enjoy mortgage interest deduction.
Interest incurred on personal mortgages is deductible from gross income before arriving at taxable income, subject to a maximum of Sh150,000 per year.
So if you are incurring at least Sh12,500 per month as interest repayment for an ordinary loan you took to construct a residential house, your workmate who took a mortgage for the same project is paying a lower tax than you.
3. Take that insurance cover
A life insurance plan is a financial product where the insured makes regular payments (called premiums) to the insurer to offer financial protection and compensation in the event of death, permanent or total disability or critical illness.
Individuals are entitled to a tax relief of up to Sh5,000 per month for premiums paid on life insurance policies, education (with a maturity of at least 10 years) or health policies taken out for oneself or for one’s spouse or child. This combined relief is subject to a maximum of Sh60,000 per year.
In addition, all future pay-outs on the policy and any bonuses are not liable to any form of capital gains tax. So if you are saving Sh60,000 in your ordinary bank account for education or health, you are better off taking an insurance cover.
4. Invest in retirement benefit schemes, old age is real
Beyond the mandatory contribution to National Social Security Fund (NSSF), save monthly with a registered pension scheme. These contributions will achieve the twin aims of saving for retirement as well as reducing taxes paid. The law provides that savings to such schemes of up to Sh240,000 per year (Sh20,000 per month) are tax allowable, meaning that they attract zero per cent Pay As You Earn.
This means that a person who saves Sh240,000 in a bank account is worse off than the one saving the equal amount in pension schemes.
Let KRA tax what is left after you save instead of you saving what is left after taxes. That’s the difference between saving in pension schemes and saving in your ordinary bank.
To sweeten it up, private pensions offer competitive returns of four to seven per cent per year on your savings. Robert Allen, the author of Multiple Streams of Income poses: How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.
5. Register your ‘hustle’ as a business entity
That side hustle of selling kukus or delivering clothes and watches to your friends at work is generating income. But you are also incurring expenses, say bus fare to order and deliver the goods.
If you are not declaring this income and paying taxes, KRA is after you. And if you are paying taxes, you probably end up paying higher than you should.
Get smart. All expenses legitimately incurred in the production of this income are tax deductible but it is hard to distinguish personal and business expenses if you have not registered it as corporate entity. Register the business and you will be well placed to reduce taxable income by charging gross income from your hustle with those expenses you are incurring but probably fail to deduct since there is no boundary between you and your business.
So next time you take a taxi to deliver 10 kukus and tomatoes to your colleague’s birthday bash, charge the bill on your business, not yourself. If the ride is Sh300 and you don’t record it, you have inflated your taxes.
6. If disabled, apply for disability certificate
KRA gives Sh12,500 per month income tax exemptions to persons with physical disabilities. But one must get a tax exemption certificate, usually valid for five years subject to renewal.
First, you get a letter from the National Council for Persons with Disabilities. One has to be examined by a doctor in a government hospital and issued with a letter confirming the disability. So if you are physically disabled and in business or employment yet you have not applied for this certificate, you are paying more taxes than you should.