WORLD OF FIGURES: How the new tax bands will affect your income in 2017

Many readers have asked me this: “Is it true that PAYE tax rates will be reduced by 10 per cent from January 2017?”PHOTO | FILE

What you need to know:

  • There are five tax bands in Kenya: 10pc, 15pc, 20pc, 25pc and 30pc. Currently, the first Sh10,164 is charged 10pc tax; the next Sh9,576 (that is, from Sh10,165 to Sh19,740) is taxed 15pc; the rate for the next Sh9,576 (that is from Sh19,741 to Sh29,316) is 20pc; the next Sh9,576 (from Sh29,317 to Sh38,892) is charged 25pc; after that, any amount from Sh38,892 attracts 30 per cent tax.

Many readers have asked me this: “Is it true that PAYE tax rates will be reduced by 10 per cent from January 2017?”

The answer is an emphatic NO! The tax rates are not being reduced, but the method of calculation will change and the effect will be a reduction in the amount payable to the taxman.

First of all, let me dispel the common misconception that high-income earners pay 30 per cent tax. That is also not true: there is no individual taxpayer in Kenya who pays that much tax.

The misunderstanding arises from the fact that many people do not know how taxes are calculated a very sad state of affairs indeed.

How can you not be interested in knowing how the government takes your money? Isn’t it the height of irresponsibility?

TAX BANDS

There are five tax bands in Kenya: 10pc, 15pc, 20pc, 25pc and 30pc. Currently, the first Sh10,164 is charged 10pc tax; the next Sh9,576 (that is, from Sh10,165 to Sh19,740) is taxed 15pc; the rate for the next Sh9,576 (that is from Sh19,741 to Sh29,316) is 20pc; the next Sh9,576 (from Sh29,317 to Sh38,892) is charged 25pc; after that, any amount from Sh38,892 attracts 30 per cent tax.

So, if you earn Sh40,000 per month, only Sh1,108 (that is Sh40,000 – Sh38,892) will attract the 30pc tax; not the entire Sh40,000. For this income, the first band attracts Sh1,016.40 tax (10pc of Sh10,164); for the second band it is Sh1,436.40 (15pc of Sh9,576); the third band is taxed Sh1,915.20 (20pc of Sh9,576); the fourth band is charged Sh2,394.00 (25pc of Sh9,576). Finally, the top Sh1,108 is charged 30, that is Sh332.40.

These amounts from each tax band are then added together to get the total tax. The answer is Sh7,094.40. This is much less than what you would get if you simply calculated 30 per cent of Sh40,000 (= Sh12,000).

TAX RELIEF

There is still one more step remaining before getting the final tax payable. Every individual taxpayer (that is, not companies) qualifies for tax relief of Sh1,162 per month. This is subtracted from the above calculation, bringing the net tax payable to Sh5,932.40.

So what will happen from January 2017? First, the tax relief will be increased to Sh1,280 per month. Next, the 10pc tax band will cover income up to Sh11,180 per month. From there, the remaining bands will increase by Sh10,533.50 up from the current Sh9,576.

Thus, from Sh11,181 to Sh21,714 will be charged 15pc; from Sh21,715 to Sh32,248 will attract 20pc; from 32,249 to Sh42,782 will be taxed 25pc; and any income above Sh42,783 will be charged 30pc. So, for a person earning Sh40,000 per month, none of that income will fall into the 30pc band. The top rate for this income will be 25pc and only Sh7,751 (= Sh40,000 – Sh32,249) will attract that tax.

The corresponding taxes for each band will be Sh1,118 (for the 10pc); Sh1,580.10 (for the 15pc); Sh2,106.80 (for the 20pc); and Sh1,937.75 for the 25pc band. Adding all these values makes a total of Sh6,742.65. Deducting the Sh1,280 personal relief leaves a net tax of Sh5,462.65. This is Sh470 less than the current value. It is certainly not a 10pc reduction. 

www.figures.co.ke;  Twitter: @mungaikihanya