Employees Earning Less Than Ksh40,000 May Face Higher Taxes Under New Finance Bill Proposal

MPs during a session in parliament. Image file

In Summary:

Proposed amendment to the Income Tax Act could increase taxes for employees earning less than Ksh40,000 monthly.
Deloitte urges Parliament to reject the proposal, citing higher administrative costs for employers.

Employees in Kenya earning less than Ksh40,000 per month may face higher taxes if the proposed amendments to the Income Tax Act in the Finance Bill, 2024 are approved.

The bill aims to change the non-taxable limit for allowances related to subsistence, travel, entertainment, and other expenses from a fixed daily rate to 5% of gross earnings.

Currently, the non-taxable limit is set at Ksh2,000 per day. Under the new proposal, employees earning Ksh30,000 per month, for instance, would see their non-taxable allowance drop to Ksh1,500 per day, down from Ksh2,000.

This adjustment would significantly reduce the non-taxable amount for lower-income earners.

Conversely, higher-income earners would benefit as their non-taxable limit would increase with the new percentage-based system.

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During a submission to the National Assembly on May 28, Deloitte and Touche LLP urged Parliament to reject the proposed amendment.

They suggested an alternative: “Where the employer has no policy or an employee’s gross earnings are below Ksh40,000 per month, the first Ksh5,000 per day be deemed a reimbursement of the amount expended and shall be excluded in the calculation of his gains and profits.”

Deloitte argued that the 5% proposal would raise administrative costs for employers without a per diem policy, as they would need to ensure all subsistence allowances are properly accounted for or subject to Pay As You Earn (PAYE) tax.

The audit firm also warned that “subjecting financial services to VAT at 16 per cent will increase their costs and will be detrimental to the government’s effort of making Kenya a financial hub and a gateway to Africa.”