Salary Deductions in Kenya: How To Calculate Net Pay.

May 8th, 2024 by Felix Cheruiyot

Salary deductions in Kenya

There is a limit on the value of deductions you can allow on your employees' salaries. Learn all about salary deductions in Kenya.

Every salaried worker knows that 'take home' pay seldom matches your basic pay. Without overtime, allowances, or bonuses, net pay is usually lower than basic pay.

Deductions consume a significant portion of gross salary earnings. Net pay drastically reduces when you add mandatory deductions like PAYE to medical aid, life insurance, and personal loan premiums. Some workers have received small fractions of their basic pay as net pay.

This article defines salary deductions, explains which ones are mandatory and which aren't, and reviews the government and parliament's actions to prevent the erosion of wages through excessive deductions.

What are salary deductions?

Salary deductions are wages the employer withholds from an employee's salary to pay taxes, garnishees, and benefits. They are also known as payroll deductions.

In Kenya, all payments made by an employer to an employee are liable for a tax deduction known as Pay As You Earn (PAYE). PAYE is a mandatory deduction registered employers must withhold from their employees' salaries and remit to the Kenya Revenue Authority (KRA).

Besides mandatory deductions like PAYE, employees can also empower their employer to deduct voluntary deductions from their salaries. These are usually for benefits such as medical aid, funeral assurance, and personal loans.

Payroll deductions account for the difference between an employee's gross earnings and 'take home' pay - the amount that reflects in their bank account or mobile money wallet on payday.

Payroll deductions are classified as pre-tax and post-tax. Pre-tax deductions are made before PAYE is deducted and are designed to reduce workers' tax burden. Post-tax deductions are made after PAYE has been calculated.

What payroll deductions are mandatory in Kenya?

Mandatory deductions are established by an act of parliament. They are part of the law and are provided for in relevant acts of parliament.

In addition to PAYE, there are other deductions mandated by law in Kenya. We will list and briefly discuss them below:

1. Income tax (PAYE)

Salaried workers in Kenya must pay an Income tax known as PAYE. This tax is mandatory for people earning at least 24,000 KES monthly. There are different tax bands for various income levels, meaning PAYE is levied progressively‚ÄĒthose who earn more pay more in PAYE.

The lowest earners, those with a basic salary of at least 24,000 KES, contribute 10% of their income to PAYE. The highest earners (at least 800,000 KES) contribute 35% of their income to PAYE.

2. National Health Insurance Fund (NHIF)

The NHIF is a government initiative that aims to improve access to affordable healthcare for all Kenyans. All salaried workers must contribute to the fund.

Like PAYE, NHIF is levied on a sliding scale but has a cap of 1,700 for high earners.

So, what is the 2.75 salary deduction in Kenya?

The SHIF will replace the Social Health Insurance Fund (SHIF) when all the implementation wrinkles have been ironed out.

The SHIF addresses the NHIF's coverage gaps. Under the SHIF, every Kenyan of working age must contribute regardless of employment status.

However, unemployed people will contribute 1,000 KES, while those in formal employment will contribute 2.75% of their basic pay. This is how the SHIF has come to be called the 2.75 salary deduction in Kenya.

3. National Social Security Fund (NSSF)

The NSSF provides social security benefits to Kenyan workers in their retirement or invalidity in the event of an accident that disables them. If they die, the benefits will go to their qualifying dependents or surviving spouses. Employees and employers contribute equally to the fund.

An act of parliament empowers the NSSF to collect contributions from workers, safe-keep and responsibly invest the funds, and ultimately distribute the benefits to eligible members or dependents.

4. Affordable Housing Levy (AHL)

The AHL is a mandatory levy for all salaried workers in Kenya. The levy facilitates the construction of affordable housing units for Kenyan citizens.

Both employers and employees pay the levy, with the employee collecting it on behalf of the government. The levy is currently set at 1.5% of gross salary, and employers must match their employees' contributions.

What is the 2-3 salary rule in Kenya?

The 2-3 salary rule in Kenya is a provision of the Employment Act of 2007 that prohibits employers from deducting more than two-thirds of an employee's gross salary income.

The 2-3 salary rule addresses the same legal requirement as the 1-3 salary rule, requiring that every employee must take home at least one-third of their basic salary.

What does this mean in light of salary deductions?

The 2-3 salary rule stipulates that salary deductions in Kenya, including mandatory and voluntary deductions, may not exceed two-thirds of an employee's basic pay. In other words, the deduction percentage should be at most 66.66.

This provision of the Employment Act is a response by the government and the legislature to the social challenges caused by excessive deductions on workers' salaries.

Some low-income earners lack the skills to analyse debt prudently and manage their salary income responsibly. So, the 2-3 rule is the government's way of controlling how much debt workers can secure against their salary income.

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As an employer, you cannot control how your employees spend their salaries beyond what the 2-3 empowers you to do.

However, disbursing their salaries on time can reduce the likelihood that they will take out loans and other forms of debt.

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