The enforcement of fresh statutory deductions to support President William Ruto’s universal health coverage (UHC) and affordable housing plan has pushed workers’ payslip cuts up to 45 percent, hurting living standards and demand for goods and services.
Employers say disposable incomes of workers have fallen to historic lows following the onset of the Social Health Insurance Fund (SHIF) deductions last month in addition to the housing levy which took effect earlier.
This has seen cumulative deductions account for between 40 and 45 percent of gross pay on average, eroding workers’ purchasing power in an economic setting where growth is largely driven by consumption.
The situation is worse for workers with other obligations such as loan repayment obligations whose take-home pay has fallen below a third of their gross pay in breach of the employment law.
The Ministry of Health last month effected SHIF deductions, slightly more than a year after enforcing housing levy cuts on pay.
At 45 percent, the payslip deductions are above those of the western world, which tend to have high income tax rates because of huge funding to social services like health and education and in others a strong welfare state.
The wage earner income tax and social security contributions in the US is at 39.55 percent, Japan 41.32 percent, United Kingdom 42.72 percent, Germany 39.39 percent and South Africa 38.22 percent, according to BBC reports citing accountancy firm PricewaterhouseCoopers (PWC).
“The enforcement of the housing levy and the SHIF, alongside Paye, has placed an increased financial burden on both employers and employees. Our members report that this has reduced disposable incomes for workers, significantly dampening consumer spending,” Federation of Kenya Employers (FKE) executive director Jacqueline Mugo told the Business Daily.
“As a result, sales across various sectors, particularly retail and fast-moving consumer goods (FMCG), have declined by an estimated 15 to 20 percent on average this year, as per the latest member feedback.”
Workers have from last month been deducted 2.75 percent of their gross pay under SHIF, cash which goes into supporting universal health coverage.
Prior to SHIF, which replaced the National Health Insurance Fund (NHIF), employees were contributing between Sh150 and Sh1,700 towards public healthcare coverage.
Contributions to SHIF have seen workers whose salaries range from Sh100,000 to Sh1 million part with an additional Sh1,050 to Sh25,800 for the State-backed insurance— making it the second largest payslip deduction after personal income tax.
This additional deduction together with the rise in National Social Security Fund (NSSF) contributions from Sh200 to up to Sh2,160 and the introduction of a 1.5 percent housing levy deduction on gross pay from July 2023 have significantly cut workers’ take-home pay.
“Due to the cumulative impact of statutory deductions (Paye, Housing Levy, SHIF, NSSF, and others), many employees’ take-home pay has fallen below the one-third threshold,” Ms Mugo said.
The law demands that workers are left with at least a third of their gross pay after all income tax rates and statutory deductions.
The reductions in take-home pay has eroded purchasing power, cutting demand for goods and services and forcing some businesses to either shut down or scale down operations.
Findings of Stanbic Kenya Purchasing Managers Index (PMI), based on feedback from about 400 panellists, has in recent months indicated companies paused hiring or firing staff in September on falling demand for goods and services.
There have also been suggestions of companies replacing permanent employees with casuals to rein in operating expenses by keeping a tight lid on staff costs.
“A typical employee has to part with significant taxes on the one hand and high loan obligations on the other. This means his purchasing power is quite weak,” Ken Gichinga, chief economist at Mentoria Economics, said. “In a period of high unemployment, you will find that the same employee is supporting a number of other persons within and beyond his family. All these things coming together means that aggregate demand for goods and services is very low and businesses are feeling this through lower revenue.”
Disclosures by the Kenya Revenue Authority (KRA) showed earlier in the month that average gross monthly pay for workers in the private sector between June and September posted a rare year-on-year drop, a situation not witnessed in at least 30 years.
The KRA said it was witnessing a trend where companies were trimming average gross monthly pay for employees, while others were increasingly tapping tax refunds to offset payroll taxes.
The drop of 2.89 percent to Sh75,781 from a similar period last year at Sh78,034, the KRA said, points to “effects of ongoing restructuring by various organisations to manage operational costs, etc”.
The drop in basic earnings, which the KRA uses to calculate Paye, will worry policymakers in an economic setting where real wages, after indexing inflation, have been falling in the past four years.
Latest findings of an annual economic survey by the Kenya National Bureau of Statistics (KNBS) showed that wages adjusted for inflation slumped to a negative 4.1 percent in 2023 when the cost of living remained elevated on costly fuel and food.
FKE said that preliminary data from the notices submitted by its members show that 10 companies have shed more than 2,000 workers since June through corporate restructuring and declared redundancies.
“This has been a response to various factors, including the economic slowdown, rising operational costs, and legislative requirements that have significantly impacted business sustainability,” Ms Mugo said.
“This number reflects only the cases formally reported to FKE, and the total figure could be higher when informal sector trends are considered.”
