PAYE (Pay As You Earn) is a crucial component of income tax in Kenya. It ensures that employees contribute their fair share to the national revenue while receiving their salaries. Let’s dive into the details of how PAYE is calculated and what you need to know as an employer or employee.
1. Understanding PAYE Basics
- Who Pays PAYE?
- Employees earning a salary or wages are subject to PAYE deductions. Employers are responsible for deducting and remitting these taxes to the Kenya Revenue Authority (KRA).
- Taxable Employment Income:
- Taxable employment income includes all cash payments, regardless of how they are described, and the value of non-cash benefits (exceeding Ksh 3,000 per month). Cash pay encompasses wages, salary, sick pay, leave pay, fees, commissions, bonuses, service gratuity, allowances, director’s fees, overtime, pension, entertainment, and any other payments received in respect of employment. Additionally, any excess mileage reimbursement to employees based on rates higher than AA Kenya rates is taxable. As of July 1, 2023, club entrance and subscription fees are also treated as taxable income if the expense has been allowed against the employer’s income.
- Eligibility for PAYE Registration:
- Any person who pays emoluments to an employee(s) must register for PAYE. The obligations include:
- Deducting tax from employees’ emoluments.
- Remitting the deducted tax to the Kenya Revenue Authority.
- Any person who pays emoluments to an employee(s) must register for PAYE. The obligations include:
2. PAYE Calculation Steps
- Determine Gross Monthly Income:
- Add up all components of taxable income to find the gross monthly income.
- Subtract Statutory Deductions:
- Deduct any statutory contributions (e.g., NSSF, NHIF) from the gross income.
- Calculate Taxable Income:
- Subtract allowable deductions (e.g., pension contributions) from the adjusted gross income.
- Apply Tax Bands:
- Kenya’s PAYE system has progressive tax bands:
- Up to Ksh 24,000: Tax rate of 10%
- Next Ksh 8,300: Tax rate of 25%
- Next 467,667: Tax rate of 30%
- Next 300,000: Tax rate of 32.5%
- All income above Ksh 800,000: Tax rate of 35%
- Kenya’s PAYE system has progressive tax bands:
- Compute Tax Liability:
- Calculate tax based on the applicable tax rate for each band.
- Deduct Relief and Rebates:
- Apply any available relief (e.g., personal relief) and rebates (e.g., insurance relief).
- Arrive at Net PAYE:
- Subtract relief and rebates from the tax liability to get the final PAYE amount.
3. Reporting and Remittance
- Monthly Reporting:
- Employers must submit a monthly PAYE return to the KRA, detailing each employee’s deductions.
- Payment Deadline:
- PAYE deductions must be remitted by the 9th day of the following month.
4. Compliance and Penalties
- Compliance:
- Employers must adhere to PAYE regulations, ensuring accurate calculations and timely remittance.
- Penalties:
- Late remittance attracts penalties, so ensure timely payments.
Conclusion
Understanding how PAYE is calculated empowers both employers and employees. Stay informed, seek professional advice, and contribute to Kenya’s development through responsible tax compliance. 
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