Tax Planning entails taking a number of measures to ensure a taxpayer’s tax expenditure is optimal and the taxpayer is able to minimize tax liabilities legally. In Kenya, there are a number of strategies that a taxpayers can use to minimize their tax liabilities legally. This entails the use of different tax strategies based on legal incentives and frameworks to minimise personal taxes and business taxes. In this article, we will delve into the different tax planning strategies in Kenya that a person can take up to minimize their personal tax liabilities to the Kenya Revenue Authority.
An Overview of the Tax Regime in Kenya
The tax regime in Kenyan is based on income source1 and residency2, according to the Income Tax Act (CAP470)3 on imposition of tax Sec3(1) “…a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya”
Under residency a taxable person is deemed to be taxed in Kenyan where the person is a foreigner if; (1) He/She was present in Kenya for a period or periods amounting in the aggregate to 183 days or more in thatyear of income; or (2)He/She was present in Kenya in that year of income and in each of the two preceding years of income for periods averaging more than 122 days in each year of income.
The tax is charged on income and gains from employment for individuals and gains from profits from businesses. As we explain the different tax planning strategies, it is important to highlight the different taxes that apply to individuals and businesses and then tackle different tax planning strategies over those taxes.
An Overview of Personal Taxes in Kenya
Personal taxes are taxes that are applicable to individual persons. An individual is required to account for and pay for tax. In Kenyan individuals working in the formal sector get direct taxes in the form of PAYE and withholding tax. Pay As You Earn (PAYE) is an employment tax where an employer is required to deduct and remit PAYE tax from employees’ salaries. On the other hand, withholding tax is tax deducted at a payment point and to individuals engaged as consultants or on service contracts that are subjected to withholding tax.
Tax Planning Strategies over Personal Taxes
There are a number of strategies that one can use to minimise Personal taxes – Employment IncoemePAYE. If you are looking at options to maximise the take-home net pay from your employment salary, here are a number of things that will work for you:
- Life Insurance Plans
- House Ownership Savings Plan
- Exemption for Persons with Disabilities
- Mortgage Interest Relief
Contribution to a Defined Retirement Scheme
Contribution to a defined pension scheme is an allowable deduction while computing taxable income. While computing for PAYE tax, gross pay is subject to the graduated scale after netting off allowable deductions, which include a defined pension contribution to a maximum limit of Ksh 30,000 per month, based on the Finance Act Amendment 2024 from the previous Ksh 20,000 per month.
The Income Tax Act Sec 22 B also extends relief to persons who are not members of any registered fund or public pension and are eligible to contribute to individual retirement funds.
This gives the opportunity to those, not in formal employment where NSSF and other pension schemes are deducted for employee retirement planning to enjoy this benefit as they contribute to the individual pension plans.
Do you have a retirement plan? Did you know you can set up an Individual Pension Plan (IPP) and start contributing or supplementing your employer’s Pension with an IPP? Get in touch with our team to get an IPP with competitive returns, ensuring you get a dignified retirement.
Life Insurance
Life insurance 4is a contract between a policyholder and a life insurance company where the insurance company assures to pay a Sum Assuered amount to the policyholder in the occurrence of an event or upon maturity. Life insurance could either be a term life policy or a whole life policy; other categories of life insurance are endowment policies and education life insurance plans.
Life insurance premiums are also tax allowable when computing taxable Pay. Sec 31 of the Income Tax Act allow resident taxpayers to get relief from the insurance premium they pay over their lives for their children and spouses. Education policy also qualifies for the relief if only they have a maturity period of at least ten years. If the policy is terminated and the surrender value is paid before maturity, the relief granted shall be recovered and surrendered to KRA by the insurer as per Sec 31 A (VI)
Contribution to a Home Ownership Savings Plan
Initially, the income tax allowed relief on Contributions to a House Ownership Savings Plan (HOSP) to a maximum limit of ksh 6,00 per month. However, this was repealed by the Finance Act 2020 Sec 6, which introduced Affordable Housing Relief.
Tax Exemptions for Persons with Disabilities in Kenya
Persons with Disabilities (PWD) who are registered with the National Council for Persons with Disabilities can apply to KRA for tax exemption. On approval, the PWD get an exemption for income up to Ksh 180,000 per month or Ksh 2,160,000 in a year.
Mortgage Interest Relief
Sec 15 3(b) of the Income Tax Act (ITA) grants mortgage relief as an allowable deduction in ascertaining the income of an individual. The mortgage interest allowable is capped at Ksh 300,000 in a year or Ksh 25,000 per month.
The mortgage must have been taken from financial institutions listed on the fourth schedule of the ITA for purchase or improvement of a premised occupied by a person in the year of income for residential purposed
Business Tax Planning for Sole Proprietors
People undertaking business as sole proprietors registered under the Registration of Business Name Act Cap 499 use their personal KRA PIN for tax purposes.
They therefore, have to explore how to maximize available opportunities to optimize their tax liabilities. As they file their annual income tax returns, which could include employment income, they have to declare in addition other business income earned in a financial year that runs Jan to December with the deadline for filing set at 30 June.
Measures Business People Trading using Personal Pin should consider include:
- Payment of Instalment Tax
- Etims Compliance
Payment of Instalment Tax
Instalment tax in tax paid in advance in four (4) equal instalments before the business closed the books to ascertain the actual tax payable for a year.
Businesses that have a tax liability of over Ksh 40,000 in a year are required to pay an instalment tax. Failure to which KRA will penalize upon filing and payment of the actual tax payable.
Etims Compliance
With the introduction of ETIMS, business expenditure can only be allowable if it was raised through ETIMS devices, i.e. USSD, eCitizen, ETIMS-enabled POS or ETR.
Therefore, if you are in business and have not been requesting for your suppliers to issue etims receipts in your PIN, you will have a challenge in deducting these expenses while computing tax payable.
This has mainly affected people engaged in professional services or consulting and commission business where Withholding is deducted. Remember, withholding tax is not final, and you are required to account for and pay for the balance of tax. This is relevant to Doctors, Insurance Agents, and Consultants paid and deducted withholding tax.
Other tax planning options for businesses are discussed in depth in our article on Corporate Tax Planning, which you can read here.
Conclusion on Tax Planning Strategies
Tax planning is a legal way of minimizing your tax expenses with the tax man. This is by taking advantage of available tax incentives such as allowable deductions to ensure you get maximum tax benefit as an individual. Examples of options available include taking up a life insurance cover of an education policy and contributing to a retirement benefits scheme. These two options are part of the Finance Planning Strategies we teach in our Personal Finance Management Masterclass.
With these two, you will defer and save for a better future where your beneficiaries are guaranteed replacement income -life insurance or your kids are guaranteed quality education – education insurance policy, while you are also assured of a dignified retirement. Through our partner agencies, we have these solutions. Get in touch with our team for more information or consultation.
Email: info@anzianoconsultants.com
Mobile: +254706600875 | +254208400605
References
- Income Tax Act Cap.470 Sec 3(1) ↩︎
- Permanent Establishment and tax implication in Kenya. (2022, May 27). RSM Kenya. https://www.rsm.global/kenya/insights/tax-insights/permanent-establishment-and-tax-implication-kenya ↩︎
- Income Tax Act Cap.470 ↩︎
- Anziano Insurance Agency. (2024, July 28). The Importance of Life insurance in Kenya and why you should have one. https://anzianoinsuranceagency.com/the-importance-of-life-insurance-in-kenya-and-why-you-should-have-one/ ↩︎
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