How workers’ take-home pay will shrink on SHIF deductions
Chairman Social Health Authority (SHA) Abdi Mohammed before the National Assembly Departmental Committee on Health at the Bunge Tower Nairobi on Monday, September 30, 2024.
Thousands of workers will this month breach the legal requirement that demands they take home at least a third of their salary following a deduction of 2.75 percent of gross pay towards the universal health coverage (UHC) programme.
The workers will pay the higher rates to the Social Health Insurance Fund (SHIF), which will today replace the National Health Insurance Fund (NHIF).
Employees have been contributing between Sh150 and Sh1,700 towards NHIF.
Contributions to SHIF will see workers whose salaries range from Sh100, 000 to Sh1 million part with an additional Sh1,050 to Sh25,800 for the State-backed insurance—making it the largest payslip deduction after personal income tax.
This additional deduction together with the rise in National Social Security Fund (NSSF) contributions from Sh200 to up to Sh2,160 and the introduction of a 1.5 percent housing levy deduction on gross pay in July last year have significantly cut workers' take-home pay.
Employers reckon that thousands of workers will take home less than a third of their pay when pre-existing loan repayment obligations are accounted for, presenting a compliance headache for managers as firms risk legal suits.
This emerges in a period that has seen real wages fall for a fourth consecutive year, a sign of falling standards of living as the squeeze from the high cost of living continues to bite.
The Employment Act of 2007 prohibits employers from deducting more than two-thirds of the basic pay of an employee to safeguard their rightful gains from employment.
Federation of Kenya Employers (FKE) says the State has remained tightlipped on requests for advice on how to comply with the law in the aftermath of the multiple deductions.
“We haven’t received any clarification. These are different government policies being implemented at the same time and we are getting the impression that there is no effort to harmonise. The focus is on implementation. Employers are still struggling with compliance,” said Jacqueline Mugo, the chief executive at FKE.
The Act provides for a general penalty of up to Sh50,000 or imprisonment of up to three months for employers who breach sections of the Employment Act.
Ms Mugo said the breach of the one-third rule had exposed employers and the government to lawsuits, adding that companies are witnessing a fall in morale and productivity as well as a spike in stress levels.
“Employers are under duty to comply with laws that the government has put in place. The exposure [to lawsuits] is there but as long as it is a government directive and it is a legal document that we have to implement, we have no otherwise,” said Ms Mugo.
Bankers said that the enhanced contributions towards the NSSF and the new housing levy were substantial and have even affected the financial plans of many workers.
Faced with this development, some banks are now opting to restructure loans to ease the pain on affected employees while some workers are cutting down on voluntary savings such as those in savings and credit cooperative societies (saccos) and banks to survive.
Those earning Sh100,000 will part with an additional Sh1,050 following the switch to SHIF while those on a monthly salary of Sh200,000 will pay an extra Sh3,800.
Additional deductions for employees on Sh450,000 will be about Sh10,675 while those on Sh800,000 and Sh1 million have extra obligations of Sh20,300 and Sh25,800 respectively. This means the enhanced compulsory contributions to the State will rise to least 21.5 percent for Kenyans earning Sh50,000, hit 30 percent for a Sh150,000 salary, and cross a third for those earning over Sh550,000.
Even before SHIF, many employers reckon they had noticed a trend of monthly deductions eating more than two-thirds of workers’ gross pay in an economy where the cost of living has remained high, with interest rates on loans having soared to highs of 18 years.
Salaried workers in February saw their contribution the NSSF double to Sh2,160, just a year after the 1.5 percent housing levy started taking away between Sh70 and Sh15,000 on earnings of between Sh50,000 and Sh1 million.
The statutory deductions look set to worsen workers' welfare in an economy where an International Labour Organisation (ILO) report showed that about 15.3 million or 80 percent of employed Kenyans were living in poverty by the end of 2022.
According to the ILO data, 26 percent of working Kenyans are ranked as extremely poor while 29 percent and 25 percent are classified as moderately poor and near poor respectively.
The data ranked Kenya at number 30 out of the 120 in terms of the economies in the world with the highest proportion of employed people whose jobs have failed to lift them out of poverty.
The poverty line used by the ILO in the ranking is the absolute international poverty line of $1.90 (Sh245) per person per day at purchasing power parity—which adjusts price level differences across economies.
“Companies are in distress. We are seeing a lot of job losses, business closures and exits of others. If companies are in distress, you cannot expect them to increase salaries,” Ms Mugo said.
“Many companies are voting with their feet by exiting but those that are hanging on keep asking us what they can do to reduce the burden on the payroll.”
