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Treasury plans for salary tax cuts over Shif, housing levy
Even before the SHIF, many employers reckon they had noticed a trend of monthly deductions eating more than two thirds of workers’ gross pay in an economy where the cost of living has remained high, with interest rates on loans having soared to highs of 18 years.
The Treasury is proposing further payslip reliefs from housing levy and Social Health Insurance Fund (SHIF) deductions, which have seen thousands of workers breach the employment law that demands they take home at least a third of their salaries.
In proposed amendments to tax laws, the Treasury seeks to deduct the housing and social health insurance levies from a worker’s gross salary before the pay is subjected to taxation, reducing one’s income tax.
Presently, the workers get a tax relief equivalent to 15 percent of their housing and SHIF contributions, which is smaller compared to the proposed regime where they are first deducted from gross pay.
The 15 percent relief, which was attached to the housing levy in March and the defunct National Health Insurance Fund (NHIF) in 2021, will be scrapped.
Workers earning Sh50,000 monthly will see their tax bill drop by Sh318, while those on Sh100,000 and Sh500,000 will get reliefs of Sh637 and Sh3,187 respectively.
“The Bill proposes to amend the Income Tax Act to provide that the following amounts shall be allowable deductions in the computation of taxable income of individuals; contributions to the Social Health Insurance Fund (SHIF), the amount deducted in accordance with affordable housing and contributions to a post-retirement medical fund up to Sh15,000,” the Treasury said in highlights of the proposed Tax Laws (Amendment) Bill, 2024—which will be tabled in Parliament in coming weeks.
“These amendments will boost disposable income and enhance the employees’ take-home pay.”
The extra relief is, however, small compared to the two new deductions that have put a heavy dent on workers’ payslips.
Workers from last month started paying the higher rates to the SHIF, which replaced the NHIF that has been deducting employees between Sh150 and Sh1,700.
Contributions to SHIF will see 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 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 in July last year have significantly cut workers' take-home pay.
Employers reckon that thousands of workers will take home less than a third of their pay when pre-existing loan repayment obligations are accounted for, presenting a compliance headache for managers as firms risk legal suits.
This emerges in a period that has seen real wages fall for a fourth consecutive year, a sign of falling standard of living as the squeeze from the rising cost of living continues to bite.
The Employment Act of 2007 prohibits employers from deducting more than two-thirds of the basic pay of an employee to safeguard their rightful gains from employment.
Federation of Kenya Employers (FKE) says the State has remained tightlipped on requests for advice on how to comply with the law in the aftermath of the multiple deductions.
Bankers said that the enhanced contributions towards the NSSF and the new housing levy were substantial and had even affected the financial plans of many workers.
Some banks are opting to restructure loans to ease the pain on affected employees while some workers are cutting down on voluntary savings such as those in savings and credit cooperative societies (saccos) and banks to survive.
Those earning Sh100,000 will part with an additional Sh1,050 following the switch to the SHIF while those on a monthly salary of Sh200,000 will pay an extra Sh3,800.
Additional deductions for employees on Sh450,000 will be about Sh10,675 while those on Sh800,000 and Sh1 million have extra obligations of Sh20,300 and Sh25,800 respectively.
This means the enhanced compulsory contributions to the State will rise to at least 21.5 percent for Kenyans earning Sh50,000, hit 30 percent for a Sh150,000 salary, and cross a third for those earning over Sh550,000.
Even before the SHIF, many employers reckon they had noticed a trend of monthly deductions eating more than two thirds of workers’ gross pay in an economy where the cost of living has remained high, with interest rates on loans having soared to highs of 18 years.
Salaried workers in February saw their contribution to the NSSF double to Sh2,160, just a year after the 1.5 percent housing levy started taking away between Sh750 and Sh15,000 on earnings of between Sh50,000 and Sh1 million.
