Teachers and other salaried employees are set to lose further if a proposal by the Treasury to eliminate reliefs on pay-as-you-earn (PAYE) taxes is adopted.
Teachers and other employees enjoy a personal tax relief of Sh2,400 which is normally indicated on their monthly payslips.
However the Treasury in its newly published medium-term revenue strategy plans to review the current tax reliefs on earnings from employment to maximise collections.
“Though the tax incentives provide governments with a policy tool to influence taxpayers’ behaviour, they come at a cost in terms of forgone tax revenue. In addition, tax incentives increase the complexity of the tax system and reduce its effectiveness as an instrument to promote equity. Studies have shown that incentives may not necessarily be effective in influencing the taxpayer’s behaviour,” the Treasury said.
Currently, salaried workers enjoy two types of tax reliefs on PAYE, including a Sh2,400 monthly personal relief for all resident individuals which is meant to lighten the tax burden on the taxpayer.
Additionally, salaried workers who have paid insurance premiums for life, health, or education policies for themselves, spouses, or children enjoy a relief of 15 percent paid up to a maximum of Sh60,000 per year.
The education and health policy must however have a maturity of at least 10 years to qualify for the tax relief.
Additionally, from January last year, contributions to the National Hospital Insurance Fund (NHIF) were qualified for insurance relief.
The Treasury’s proposal to axe either or all of the tax reliefs has however puzzled tax experts who reckon the move would only further impact the disposable income of households who are already adjusting to the recently introduced housing levy at 1.5 percent of gross salaries and higher deductions to the National Social Security Fund.
“How you tax households is very important as it has the ripple effect on purchasing power. This would affect the revenues and profitability of companies and ultimately GDP. The economy is run by salaried workers whom I call the middle class,” Francis Kamau, a Partner and Tax Leader at Ernst & Young said.
The National Treasury has nevertheless outlined mitigation measures for the elimination of the tax reliefs including setting a new PAYE tax band at zero percent.
“With the removal of personal relief, the low-income tax earners will be cushioned in line with the adjusted tax bands by creating a zero-rate tax band,” the exchequer added.
At the same time, the government is mulling over cushioning top earners by trimming the top PAYE tax rate from the recently introduced ceiling of 35 percent to 25 percent in a restructuring of tax bands to eliminate opportunities for tax avoidance and evasion.
The move comes just three months after the 2023 Finance Act introduced two new tax bands at 32.5 percent and 35 percent on monthly employment income above Sh500,000 and Sh800,000 respectively.
The new PAYE bands were viewed as ineffective in yielding higher revenues for the exchequer from employment income.
“The anticipated increase in revenue may be negligible given that the majority of employees in Kenya earn below Sh100,000 per month,” noted tax analysts at KPMG.
Currently, workers with salaries up to Sh24,000 a month do not pay PAYE taxes owing to the personal relief of Sh2,400 which matches the 10 percent rate of tax on the lowest tax band.
The remainder of salaried workers incur Paye taxes at the rate of 25 and 30 percent respectively.
