Salaried workers to enjoy tax relief

Thousands of schoolteachers, principals, civil servants and private sector employees will enjoy lower taxes from January as the government effects changes to the income tax law.

Employees will also get higher personal relief — the amount returned to workers after tax every month.

There are also proposals to eliminate taxes on bonuses, overtime and retirement benefits paid to workers who fall under the lowest-income tax band though there is no mention of how this will be effected in the circular sent to companies.

Staring January 1 next year, personal relief will be raised from the current Sh13,944 per year (Sh1,162 per month) to Sh15,360 per year (Sh1,280 per month).

The Treasury has notified human resources departments across the country to effect the changes from January.

Workers at the bottom of the wage scale who currently earn Sh10,164 per month, mainly cleaners, subordinate staff, messengers and other low-cadre staff, and pay a total income tax of Sh1,016 will now be fully exempted from the deduction as the lowest taxable bracket now climbs to Sh11,180 per month.

Those earning Sh38,893 — mainly entry-level graduate employees in the public sector and which is the current starting point of the highest band where a 30 per cent income tax is applicable — will also enjoy a reduction as the highest rate will now touch those earning Sh42,782 and above.

“Effective 1st January 2017, annual tax bands should be expanded by 10 per cent and a personal relief increased from the current Sh13,944 per annum (Sh1,162 per month) to Sh15,360 per annum (Sh1,280 per month),” reads the circular sent to companies and organisations.

The relief, first announced by Treasury Cabinet Secretary Henry Rotich in the 2016/2017 budget, is designed to create comfort for those whose taxable employment income before bonuses and overtime allowances does not exceed the lowest band, which is Sh10,164 per month or Sh121,960 per year.

STEP IN THE RIGHT DIRECTION

The first band will be deducted at 10 per cent, rising in the series of taxable income that terminates at 30 per cent at the highest band, which is now put at a minimum of Sh513,373 per year or Sh42,781 per month.

Tax expert Nikhil Hira said the move was a “step in the right direction” but called for frequent revisions of the bands to keep pace with the changing cost of living in the country.

“This is definitely meant to create the biggest impact on those in the lowest income bracket whose monthly personal relief will also go up.

"Those in the upper income level will, however, not feel it much because relative to their income in the graduated scale, they will only be claiming more relief.

"In some countries, the band is revised almost every year and in our case, someone earning Sh11,000 where the new minimum is, still struggles anyway,” Mr Hira said.

Kenya last revised its tax relief for workers in 2005, although there have been various inflationary fluctuations since then, including the economic decline after the post-election violence in 2008 and the fall in the value of the local currency in 2011.

Although proposed in June and expected to have come in July, income tax laws are usually hard to apply in the middle of a calendar year and therefore the push to January.

The benefits are part of the larger beneficial tax measures adopted by the government, including the elimination of tax on bonuses, retirement benefits and overtime as outlined in the 2016 Finance Act.

Those in the lowest-income tax band (earning below Sh10,165 per month) are already exempt from tax on their bonuses, overtime and retirement benefits in the June proposals.

CUSHION WORKERS

“These measures are meant to cushion the workers from the high cost of living and demonstrate our commitments to sharing the growth of our economy,” Mr Rotich said as he read the budget. 

The relief comes amid a high cost of living, with consumers already grappling with rising inflation that hit an eight-month high of 6.47 per cent last month from 6.34 per cent a month earlier.

This, according to data from the Kenya National Bureau of Statistics, was pushed by rising food inflation, including an increase in the price of sugar and maize flour.

For those whose salaries now fall below the taxable income of Sh11,120 and who were bearing the 10 per cent tax burden, the Sh1,000 will now allow them to put some more food in their shopping baskets, including a 2kg packet of sugar, five packets of 2kg maize flour and some change.

Food takes the largest share — 36 per cent — of inflation, making it the main driver of the cost of living.

Food prices that rose last month include those of sugar, which went up by Sh5 on average to Sh125 a kilo, Irish potatoes by Sh3 to Sh80 a kilo and sifted maize flour by Sh2 to Sh115 for a 2kg packet.

The relief may also be useful in securing personal loans in the revised credit regime besides being used as savings, which would accumulate to Sh12,000 at the end of the year.

The Jubilee administration’s second-last budget before the General Election, dubbed a "pro–poor, pro–production" budget, was sharply criticised for hitting low-income earners after it proposed more tax on kerosene and raised the road maintenance levy on petrol and diesel.

The government had also proposed to reduce the prices of stoves, lowering import duty on the products from 25 to 10 per cent.