Calculating Pay As You Earn (PAYE) in Kenya is a compulsory aspect of payroll processing. Failure to comply with KRA regulations can lead to significant penalties, underscoring the importance of understanding this process. The journey from your gross salary to your net take-home pay involves several key steps, definitions, and calculations.
First, it is essential to understand what constitutes taxable employment income. In Kenya, this includes all cash payments, such as your basic salary, wages, leave pay, sick pay, commissions, bonuses, and allowances. Furthermore, non-cash benefits like a company car or housing provided by your employer are also valued and added to your income. As of July 2023, even excess mileage reimbursement and club entrance fees paid by an employer can be considered taxable benefits.
Step 1: Determine Your Gross Salary and Allowable Deductions
Your gross salary is the starting point. It's the total remuneration before any deductions are made. From this, certain statutory contributions are subtracted to arrive at your taxable income. These deductions are critical because they reduce the income on which tax is levied.
The primary allowable deductions for a salaried employee are:
- Affordable Housing Levy (AHL): A mandatory 1.5% deduction from your gross salary.
- Social Health Insurance Fund (SHIF): Replacing NHIF, this is a 2.75% contribution from your gross salary (with a minimum of KSh 300).
- National Social Security Fund (NSSF): A tiered contribution for retirement. For 2024/2025, this is calculated as 6% on earnings up to KSh 7,000 (Tier I), and another 6% on earnings between KSh 7,001 and KSh 36,000 (Tier II), for a maximum total of KSh 2,160.
- Pension Contributions: If you contribute to a registered private pension fund, that amount is also deductible, but the total pension deduction (NSSF + private) is capped at KSh 20,000 per month.
Step 2: Apply the Graduated KRA Tax Bands
Once you have your taxable income (Gross Salary - Deductions), you apply KRA's progressive tax rates. This system ensures that higher earners contribute a larger percentage of their income in tax. The monthly tax bands effective from July 1st, 2023, are as follows:
| Monthly Pay Bands (Ksh.) | Annual Pay Bands (Ksh.) | Rate of Tax (%) |
|---|---|---|
| On the first 24,000 | On the first 288,000 | 10% |
| On the next 8,333 | On the next 100,000 | 25% |
| On the next 467,667 | On the next 5,612,000 | 30% |
| On the next 300,000 | On the next 3,600,000 | 32.5% |
| On all income above 800,000 | On all income above 9,600,000 | 35% |
The tax is calculated in brackets. For instance, if your taxable income is KSh 50,000, the first KSh 24,000 is taxed at 10% (KSh 2,400), the next KSh 8,333 is taxed at 25% (KSh 2,083), and the remaining amount (KSh 17,667) is taxed at 30% (KSh 5,300). The sum of these amounts gives you the Gross Tax.
Step 3: Subtract Your Entitled Tax Reliefs
The final step is to subtract tax reliefs. These are a direct reduction of the tax you owe, not your income. They are a significant benefit to all taxpayers.
- Personal Relief: Every resident individual is entitled to a personal relief of KSh 2,400 per month (KSh 28,800 per year).
- Insurance Relief: You receive a relief of 15% of the premiums you pay for life, health, or education policies. Your SHIF contribution is included in this calculation. The total relief is capped at KSh 5,000 per month.
The final PAYE amount is therefore: (Gross Tax) - (Personal Relief) - (Insurance Relief). Knowing these steps empowers you to understand your payslip, ensure compliance, and plan your finances with accuracy and confidence.
