SUMMIT TECHNICAL COLLEGE

EMPLOYMENT INCOME
Employment is a relationship between the employer and the employee where the employee provides services for a
consideration. Employer includes any person having control of payment of remuneration to employee. Employee is any
holder of an appointment, of office whether public or private or as a calling for which remuneration is paid.

Employment benefits can be categorized into two:

1. Cash benefits.
They include
a) Direct cash benefits such as salaries, wages, commissions, bonus etc.
b) Any form of allowance e.g. directors’ allowance, medical allowance, house allowance, commuters’
allowance, risk allowance hardship allowance
c) Any private expenditure for an employee that is paid for by the employer e.g. insurance premium and
household expenses.
d) Amounts that are deemed to be gain or profits from employment derived from Kenya. N.B: Cash
benefits are taxable.
2. Non- cash benefits.
a) Benefits in kind. They include meals, gifts and awards. Such benefits are taxable if the value is more than
Ksh.3,000 per month or Kshs.36,000 per annum.
b) Servants provided by the employer e.g. gardeners, drivers, security guards, house manager etc. The taxable
benefit is the high of:
i. Amounts incurred by the employer.
ii. Market value for such services
c) Services provided for by the employer e.g. Electricity, water, furniture and telephone etc. The taxable value is
the higher of:
i. Cost incurred by employer.
ii. Value as per the quantified benefit tables provided by the commissioner.

- For furniture the taxable value is 1% of the cost of furniture per month or 12% Per Annum.

- For telephone the taxable value is 30% of the cost paid by the employer.

d) Motor vehicle benefit – This arises where the employer provides a vehicle to the employee for use. If the vehicle is
owned by the employer the taxable benefit shall be higher off

a) 24% of the cost of the vehicle per annum (2% of the cost per month)
 b) The engine capacity or CC rating of the vehicle as per the quantified benefit table

Where the vehicle is leased from a third party the taxable benefit shall be the cost of leasing the vehicle.

e) Housing benefit

This is where the employer provides a house to the employee, the house may be owned by the employer or leased from
a third party. The housing benefit depends on the category of the employee:

a) Agricultural Employees – this are employees who are required by terms and conditions of the employment to
reside in an agricultural farm. The taxable housing benefit is:
10% of all employment benefits less nominal rent. (amount contributed by the employee
towards the house rent.
b) Whole time service directors / ordinary employees – This are employees who devote substantially the whole of
their time to the service of the employer and do not own or control 5% or more of the share capital of the
employer’s company.
The taxable housing benefit is the higher of:
a) 15% of all employment income less nominal rent.
b) Market rental value of the premises less nominal rent.
c) Non-whole-time directors – The taxable benefit is the higher of:
a) 15% of the total income less nominal rent.
b) Market rental value of the premises less nominal rent.

Exceptional cases in housing benefit

There are circumstances where the housing benefit shall not be considered as a taxable benefit:

a) Where the house is provided as basis of effective performance of duties of the employee e.g. building
caretaker.
b) Where the house is provided as part of security detail e.g. Police in the military.
c) Where the house cannot be separated from employment or performance of services.
d) Where the housing is a necessity to the employees’ proximity to the work station.

NON-TAXABLE BENEFITS
1. Passages to non-citizen employees

This is a cost incurred by the employer for transport between Kenya and the country of origin. For the benefit to be
non-taxable the following conditions must be fulfilled:

a) The employee must not be a Kenyan citizen.

b) The employee must be in Kenya only to serve the employer i.e. should not be engaged in other
economic activities
c) The employee must have been recruited from outside Kenya.
d) The amount must be used for transport between Kenya and the country of origin.
2. Non- discriminatory medical scheme:
This arise where the employer provides medical care to all the employees (non-discriminatory scheme). Medical
benefit provided to non-whole-time directors, partners or a sole proprietor including their beneficiaries is not
taxable up to a maximum of Kshs.1,000,000 per year. Where the employer operates a discriminatory scheme,
the benefit is taxable.
3. Benefits in kind whose value is less than Kshs.3,000 per month or 36,000 per year.
4. Fringe benefits
This arises when the employer provides a loan to the employees at an interest rate which is lower than the
prescribed rate.
 The fringe benefit =corporation tax rate* Loan * (Prescribed rate – actual rate)
5. An amount of Kshs.2,000 paid per day to an employee working outside the usual workstation (per-diem)
6. Employer’s contribution on behalf of the employee to a registered pension scheme or provident fund.
7. School fees paid on behalf of the employee as long as it is not treated as an allowable expense by the employer.
8. Meals provided at the employer’s canteen or by a third party registered as taxpayer where the value of the meal
does not exceed ksh 4,000 per month or Kshs.48,000 per year.
9. The first Kshs.150,000 per month paid to a person who is registered by the national council for persons with
disability approved by the commissioner
10. A third (1/3) of employment benefit paid to non-citizen resident employees who are outside Kenya for 120 days
or more in a given year of income.

ALLOWABLE DEDUCTIONS
1. Employees’ contribution to a registered pension scheme or provident fund. The allowable deduction is the lower
of:
a) Employee actual contribution.
b) 30% of pensionable income.
c) Maximum of Kshs240,000 per annum or Kshs.20,000 per month
2. Owner occupier mortgage interest.
This arises where the employee acquires premises for residential purposes on mortgage.
The maximum allowable deduction is Kshs.25,000 per month or Kshs.300,000 per year.
3. Amounts of contributions by an employee to a professional body as subscription of membership.

RELIEF
1. Personal relief
It is granted to all resident individuals at sh 2,400 per month or 28,800 per year. The relief is granted in
proportion to the period which one has been resident in given year
2. Insurance relief.
This is granted to all resident individuals who pay life assurance premiums and premiums on education policies
with a maturity period of 10 years.
It is granted at 15% of the premiums paid, subject to a maximum of Kshs.5,000 per month or Kshs.60,000 per
year.

INCOMES FROM PAST EMPLOYMENT (PENSION AND PROVIDENT FUND.)

Pension fund is created by the employer to secure benefits to the employees upon retirement.

Provident fund is created to secure benefits to the employee when he/she leaves employment before the retirement
date. Individual retirement fund is created to cater for employees who do not have a formal pension scheme or
individuals who are self-employed.

Withdrawals from pension or provident funds.

The withdrawal can either be a lumpsum or annuity. Where it is a lumpsum the first Kshs.60,000 per annum * No. of
years of service, subject to a maximum of Kshs.600,000 of 10 years is exempted from tax.

Withholding tax.

It is Tax at Source. This is where taxes are deducted on incomes before the tax payer has received the income. The tax
payer receives the income net of withholding tax. The person making the payment of income has a statutory obligation
of deducting the tax and remitting the tax within a given period to the revenue authority.
 Advantages of using withholding tax system.
1. It reduces the chances of tax evasion.
2. It reduces the cost of collection of the tax by the government.
3. It is convenient to the tax payer.
4. It ensures that the taxes are collected on time.
Disadvantages of using withholding tax system.
1. It is expensive for the person making payment of income.
2. It may lead to delay in remittance of taxes where the person making the payment does not remit the tax on
time.
3. It can lead to tax evasion where the tax payer and the person making the payment of income doesn’t disclose
the payment of income.

Tax Set-off

This is taking credit of taxes already paid in advance. It is applicable where the withholding tax deducted is not a final
tax.

Taxation of dividends.

These are distribution of profits usually in the proportion of shareholding. They are taxed in the year they are received
but not the year earned. They can be classified as follows:

1. Exempt dividend/ Non-taxable dividends. They include

a) Foreign dividends or dividends from non-resident companies
b) Dividends received by a company that owns or controls more than 12.5% of the voting power or
share capital of the paying company.
c) Dividends received by insurance companies from investment in the life assurance fund.
d) Dividends received by financial institutions which are specified in the forth schedule of the
income tax act (Banking Institutions and Building societies)
2. Qualifying dividends,
These are Dividends subject to withholding tax at 5% which is final. They are dividends received from
a) Public limited Company.
b) Private Limited Company
c) Savings and credit co-operative societies. (SACCO)
3. Non-Qualifying dividends.
They are dividends subject to withholding tax at 15% which is not final. i.e They would be subjected to further
taxation. They are dividends received from co-operative societies which are not Saccos.
Interest Income.
Exempt interest

Interest from the following sources is exempted from tax:

 Interest earned from a foreign country

 Interest earned from government bond with a maturity period of more than 2 years.
 Interest earned from savings in post bank
 Interest of up to Kshs.300,000 per annum earned from housing development bonds.
Qualifying interest

This is interest from financial institution and government treasury bills which is subjected to withholding tax at 15%
which is final for individuals and not final for corporation