Employers have a statutory duty to deduct taxes from their employees' incomes. Does such income include allowances? Learn what allowances are taxed in Kenya.
Employers act as tax collection agents of the Kenya Revenue Authority and must perform this duty whether or not the authority has specifically instructed them to do so.
But what constitutes taxable employment income? For example, are all cash payments to employees, including allowances taxable in Kenya? What is an allowance to start with?
Read on as we break it all down.
What is an allowance in salary?
An allowance is a payment made by an employer to its employees to cover certain expenses. It can also be paid as compensation for unfavourable working conditions.
Allowances help employers cater to their employees' varied needs, motivating them and removing distractions that may distract their attention from their jobs.
What is an example of an allowance?
A typical example of an allowance many employers pay is the transport allowance, usually paid to employees who spend more on transport than others.
For instance, employees transferred to work at another branch where they have to take a second bus may be due a 'second bus allowance'.
Paying a second bus allowance shows you recognise the increased burden on employees who must take two buses on their work commute.
The same applies to salespeople who must buy lunches and entertain prospects during work. It is only right to pay them an entertainment allowance to cover that expense.
Other examples of allowances are:
- City compensation allowance, also called dearness allowance, is paid to employees who live in cities like Nairobi, where the cost of living is higher,
- Conveyance allowance paid to cover fuel and transport costs for employees who travel around frequently as part of their work,
- Servant allowance, paid to cover an employee's personal servant's salary,
- Housing allowance that you may pay an employee who is relocating to a specific location for work,
- Communication allowance is paid to certain employees, like salespeople, to cover their cellphone bills,
- Medical allowance is provided to employees to cover their private healthcare and related medical costs.
Other allowances are only paid to senior management personnel—for example, school fees allowances for children are paid to senior managers.
Similar to benefits like golf club membership, these allowances are perks offered to make the company more attractive to professionals with in-demand skills and experience.
Are Allowances Taxed in Kenya
Allowances are paid in addition to the employee's regular salary. They add to an employee's basic salary to produce their gross salary. But should you add them after or before you have deducted PAYE? Are they taxed?
Allowances are generally taxable in Kenya. They are cash benefits that are subject to taxation under Section 3 (2) (a) (ii) and Section 5(2) (a) of the Income Tax Act.
We say allowances are generally taxable because some are only taxable at a certain threshold. Such allowances are only taxable when they exceed a certain amount a month.
Taxable allowances must be added to the employee's taxable salary income so you can deduct and remit the tax accordingly.
Some non-cash allowances and benefits are also taxable.
Therefore, to meet your tax collection obligations to the KRA, it is essential to keep track of and correctly categorise the different allowances you pay your employees.
Which salary allowances are taxed in Kenya?
Most allowances and benefits employers extend to employees are taxable, including non-cash ones like car and housing allowances.
However, special rules apply regarding the amount of tax due on housing allowances, depending on the categories of employees and the ownership of the housing property involved.
Some allowances are exempt from tax, like lunches served by the employer or a third party that is a registered taxpayer. Others are bonuses, overtime pay, and retirement benefits.
However, these allowances are only exempt from tax if the gross income stays within the lowest tax bracket. If it exceeds it, then the allowance is taxed wholly. For example, an employee's lunch allowance is taxable if it exceeds 4,000 KES per month.
What allowances are not taxable in Kenya?
While most allowances are taxable, there are a few exceptions. An allowance is totally exempt or is taxable after it exceeds a certain amount.
Since the enactment of the Finance Act in 2020, all overtime, bonuses, and retirement benefits are exempted from tax as long as the total income does not exceed the lowest tax bracket.
Before the Finance Act was enacted, overtime, bonuses, and retirement benefits for people whose basic salary was within the lowest tax bracket enjoyed tax exemption. The total or gross income could exceed the lowest tax bracket.
There is also the issue of reimbursements that could be confused with allowances. An example is daily stipends paid to employees for daily expenses outside their usual workplace but on official company business.
Known as per diem, such payments are not an allowance and should not be taxed. They are reimbursements for expenses the company would typically cover.
Actual allowances exempted from tax include meals offered to employees at work and other benefits whose total value does not exceed 3,000 KES. The allowances will be taxed wholly if the total value exceeds that amount.
Allowances that are exempt from tax are gratuity payments into retirement schemes. However, these only enjoy tax exemption if paid to pension schemes registered with the KRA.
How to simplify disbursement of salaries and allowances.
Paying allowances is an excellent way to motivate your employees and focus their attention on their work. But just as crucial is collecting all the taxes due on those allowances, which entails knowing what allowances are taxable and at what rate and threshold.
Contact the KRA for guidance if unsure which allowances should be taxed. Otherwise, invest in good payroll or accounting software to ensure you are collecting and remitting the correct amounts in PAYE.
Automating your payroll removes errors and streamlines the process to ensure tax and salary calculation accuracy. But to ensure timely salary payments, you need an enterprise disbursement solution like Intasend.
With Intasend, you can disburse salaries and allowances on time every time. Sign up here to explore ways to streamline your business payments and disbursements with Intasend.
