Payslips to grow thinner as new taxes kick in this month

Payday always brings happiness and excitement.

However, the end of this month heralds anxiety, frustrations and even anger as new taxes kick in and reduce the take-home pay for Kenyans in formal employment.

The controversial affordable housing levy that came into effect on July 1, which will see employees part with 1.5 per cent of their gross pay, is among the recent tax measures that are expected to result in thinner pay for Kenyans in formal employment.

The new pay-as-you-earn (PAYE) rates for high-income earners will start applying in September this year, where people earning between Sh500,000 and Sh800,000 will pay PAYE at a rate of 32.5 per cent, up from 30 per cent.

Employees earning over Sh800,000 will pay a higher tax of 35 per cent.

Government will however have to wait longer  before it can implement the Finance Act of 2023. This is after the High Court extended interim orders stopping the State from implementing new taxes pending a substantive ruling on the suspension of the taxes on July 10.

President William Ruto assented to the Bill on June 26 and some taxes such as a hike in fuel prices have already been implemented despite the court order.

Busia Senator Okiyah Omtata had challenged the implementation of the Finance Act on the grounds that the Senate was not involved in the passing of the controversial law.

Other impeding higher deductions include the planned increase in the National Hospital Insurance Fund (NHIF) rates to 2.75 per cent of salary. NHIF contributions are also matched by employers at 2.75 per cent.

NHIF rates are currently on a graduated scale, with those earning Sh100,000 and above paying the highest Sh1,700 per month. It was changed in 2021 when workers and their employers paid a combined Sh700 per month.

All these deductions will leave a dent of Sh2,028 for an employee earning Sh90,000 a month, with the housing levy having the biggest impact, reducing the take-home by Sh1,350.

If the proposed rates for NHIF are implemented, the rate for such an employee will increase to Sh2,475 per month from the current rate of Sh1,200.

The impact will be bigger for high-income earners, with a person earning Sh830,000 expected to see the new deductions total Sh34,994.

The new housing levy will be at Sh12,450 a month while the monthly NHIF deductions will increase to Sh22,825 from the current rate of Sh1,700. Analysts noted that Kenyans might feel overtaxed because the new taxes are being loaded on the same people while more efforts should be made on growing the tax base to reduce reliance on the same cluster of taxpayers.

The impact of the finance act 2023

“It is the same people that you target with the 1.5 per cent housing levy,” said Alex Kanyi, Partner in the Tax and Exchange Control at Cliffe Dekker Hofmeyr (CDH) 

“There have been arguments to the effect that there are a lot of people in the informal sector who are not paying their fair share of taxes and the government could invest in ensuring that they come to the tax net as opposed to taxing the people who are already in the tax net more.”

He adds: “As opposed to taxing the group of about three million employees who rely on salaries and government gets the PAYE, why not think about other populations of Kenyan adults who may not be paying taxes.”

The higher taxes and proposal to hike NHIF rates are coming months after the state increased the rates for the National Social Security Fund (NSSF), whose costs are also shared between the employee and employer.

NSSF rates went up to Sh1,080 up from a previous Sh200.

The contribution is then matched by the employer to bring the total contribution to Sh2,160 per month.

Mr Kanyi noted that the Act had to an extent shielded employers from the adverse effects of the housing levy.

“The provisions of the Act are such that what the employer pays on behalf of the employee is an allowable deduction. At the end of the year, when the employer is calculating their taxes, they will take what they contributed on behalf of the employee as an expense, therefore, reducing the overall tax liability,” he said.

Cash flow 

Thus, he noted, could cushion the employer but the challenge will, however, be on the cash flow element of their business.

The employers are expected to account for the housing levy on the 9th day of the following month, the same day they account for PAYE and other employment-related taxes.

“This will mean that an employer will be paying the levy every month and only get the deduction at the end of the year,” he noted.

“From a cash flow perspective, the employer will still be hit because this money would have gone somewhere else… it could have gone to creating more employment, buying more goods for production or financing a trade arrangement.”

Initially, this had been set at three per cent of an employee’s basic pay that would then be matched by their employers, also at three per cent.

The contribution had been capped at Sh2,500 per month for the employee and employer, translating to a cap of Sh5,000 a month.

The levy, which was hugely unpopular going by public sentiments, has been retained in the Act albeit slightly altered. As opposed to a contribution, it was transformed into a mandatory levy. It was reduced to 1.5 per cent for both the employer and employee but is now not capped.

Labour costs

Employers warned that this could lead to stagnation in job creation and even possible layoffs in an attempt by companies to contain high labour costs.

“The Housing Levy will increase the payroll costs by 1.5 per cent and at the same time reduce the employee take home. We are likely to see an increase in agitation from workers demanding that employers increase the wages,” the Federation of Kenya Employers (FKE) told The Standard this week.

“We hope that the housing development programme will be implemented well so that the benefits to the economy of jobs, improved manufacturing and circulation of money in the economy is realised.”

 The employers’ lobby said that the implementation of the Finance Act would increase business operating costs, which may push businesses to adopt new models such as automation, outsourcing and casualisation, and in the worst case lead to massive job losses.

“This may further lead to a shrinking in the formal wage employment opportunities in Kenya,” said FKE.

“FKE has continued to engage the government on various provisions in the Finance Bill 2023 which is now an ACT, with a view of ensuring we get a win-win policy directives. We stand for social dialogue and our prayer is that we will continue to engage until we have a business environment that supports growth of enterprises to create employment and wealth for our country.”