Are you aware that your personal income tax in Kenya is up to 30% of your earnings? Interestingly, by utilizing various legal provisions on Kenya’s laws and rules on taxation, you can significantly lower your obligations as an individual taxpayer. In this post, learn best tips for tax planning for salaried employees learn 8 ways you can reduce the amount of income tax you file on Kra Itax.
General tips to how to reduce your income tax
The available tax planning for individuals in Kenya can be categorized into the following areas.
- Adjust your Gross income– Your Gross income is the total amount on which you are liable to pay file income tax during KRA returns. A legally reduced amount means reduced payable taxes.
- Tax Crediting- Adjust the amount of payable tax amount by introducing some activities that have exemptions such as Mortgages and life insurance
- Invest in Retirement Plans- Investing in retirement benefits, pensions or the National security services fund (NSSF), entitles you to deductible reliefs.
The following section will explain these methods further in details. Besides, you will get the total estimated tax savings.
Related: How to reduce your Business/Corporate income tax in Kenya
Tax planning opportunities for individuals in Kenya in 2022
The following are 8 tax planning methods in Kenya for you to reduce your taxation burden or liability. They are allowed for by the income tax act . They are;
1. Invest in life Insurance
As an individual taxpayer in Kenya, you are entitled to a 15% of premiums paid on life insurance policies with a maturity of at least 10 years. The combined relief in the Paye calculator has a set maximum of Ksh 60,000 per year.
You can take the policy on education, health or a life. The law allows you to take these one on self, spouse or child.
2. Contribute to a registered retirement benefits
As an employee in Kenya, you can get an admissible tax deduction by contributing to any pension fund, whether a registered defined benefit fund or defined contribution fund.
In addition to reducing your taxes paid, you also get to build your retirement savings.
The employee’s deductible contribution is the lesser of:
- 30% of pensionable pay.
- Employee’s actual contribution.
- Ksh.20,000 per month
Once you retire, when receiving your savings lumpsum, a sum of ksh 60,000 is deductible from the maximum of a Ksh 600,000 lumpsum. The rest of your savings are applicable to the current income tax bands.
If you opted for an individual retirement scheme or pension scheme, and opt to use your retirement savings for an annuity you can then enjoy further tax benefits on
- The first Kshs 300,000 of the total pensions or retirement annuities received annually are tax exempt.
- Personal relief is applied to reduce the taxable income.
Finally, if you are a senior person who is ver 65 years old, then you are wholly tax-exempt.
3. Mortgage interest deductions
Do you know you can reduce your taxable income up to Ksh 300,000 in Kenya per year? The interest you pay on personal mortgages is deductible from your gross income to get the adjusted taxable income. The total amount allowable per month is Ksh 25,000.
4. Affordable housing schemes
You can enjoy a tax benefit of up to Ksh 108,000 per year by contributing to a registered affordable housing scheme.
It is a plan designed by the government to help individuals to save and purchase their residences. Its deducted at 15% of your contributions up to a maximum of ksh 9000 per month.
5. Invest in unit trusts and collective investment plans
Another tax saving vehicle for individuals in Kenya is investing in acquisition and disposal of assets that do not constitute a business activity. According to the income tax Act sec 3(2)(a), A “business” includes any trade, profession or vocation, and every manufacture, adventure, or concern in trade.
You can choose to buy Unit Trusts or other Collective Investment Schemes such as mutual funds. You will only have to pay a withholding tax on dividends and interest income that they will generate. Any subsequent distribution from such those investment proceeds to members are also exempted from tax.
6. Charitable donations
You can reduce your tax liability by either establishing or making donations to a charitable trust or foundation.
According to Sec 10 of the 1st schedule of the income tax, contributions to a tax-exempt entity is exempt from tax. Further, in Sec 13, a registered trust is exempt from income tax.
Tax exempted entities according to the Act are an “institution, body of persons or irrevocable trust, of a public character, established solely for poverty alleviation or distress of the public, or the advancement of religion or education, all for public benefit, shall be tax-exempt.
7. Noncash benefits and remunerations
Another avenue for individuals to save on tax liability in Kenya is through non cash benefits or remunerations. Some of the available methods are.
- An employer can provide meals to employees and limit the cost of these meals to the tax-free amount of Ksh 4,000 per month (Ksh 48,000 per annum).
- Where the value of a benefit, advantage, or facility is Ksh. 3,000 per month or Kshs. 36,000 per annum, then that benefit is not subject to tax.
- Negotiate with your employer to be granted a n option for compensation using stock option. You will be exempted from taxation on capital gains for any increase in the value of the shares, from the date the shares vest (and are taxed) to the date of the actual exercise of the options. Though you should note this is not a common practise in Kenya.
8. Business operation expenses
Finally, you can consider deducting your side-hustle or business expenses on your personal income to adjust your taxable income.
A “business” includes any trade, profession or vocation, and every manufacture, adventure, or concern in trade. All expenses you incur such as rent, transport and telephone charges are further deductible when further computing final dues in addition to the withholding tax already paid by your client.
Conclusion
The above methods present some available strategies for you to minimize your tax liability. As a tax management or planning advice, we recommends that you work with a qualified and a competent tax consultant for file tax returns that are accurate for you.
