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How your payslip will look like from July after new deductions

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Payroll taxes for the financial year ended June, grew at the slowest pace in at least seven years. FILE PHOTO | SHUTTERSTOCK

If you earn a basic salary of Sh100,000 a month, you should prepare to part with at least Sh4,380 more in extra-statutory deductions, as President William Ruto raids pay slips in the latest tax proposals set to be considered by parliament.

Calculations by the Business Daily show that the take-home salary of these workers—who fall in the median middle-class family in Nairobi according to computation on expenditure pattern by the Kenya National Bureau of Statistics (KNBS) —will reduce from the current average of Sh76,041 to Sh71,661.

This is after the government deducts the proposed enhanced deductions for the National Health Insurance Fund (NHIF), the National Social Securities Fund (NSSF) and the three percent cut on their basic salary to a new Housing Development Fund.

“The introduction of additional deductions from employee emoluments will further reduce the take-home pay of employees,” said audit firm PwC in a tax alert.

The audit firm said the proposal will overburden employers with an increased cost of remunerations and may lead to loss of current employment or potential job opportunities.

Employers, who opposed the levy the last time it was introduced by the administration of former President Uhuru Kenyatta, will also be expected to match the three percent contributions.

Should these changes be approved by MPs and assented to by the Head of State, those with a monthly salary of Sh100,000 will lose close to a day’s worth of expenditure.

Read: Review legality of new taxes

The effect of the new changes, which President Ruto reckons will boost savings and safeguard the health of workers and their families, will cut across all income groups with those with a basic monthly pay of Sh20,000 taking a haircut of Sh2,630 on their take-home salary.

For those with a low-income salary such as those earning less than Sh20,000 a month, taking Sh2,630 from them will mean a deep cut on their food spending as food takes over 40 percent of their incomes.

President Ruto recently announced that the current rates, in which salaried workers pay between Sh150 and Sh1,700 depending on their monthly pay, are going to be phased out and replaced with a flat rate of 2.7 percent of the salary.

The proposed changes will see earners of between Sh39,999 and Sh100,000 per month increase contributions of between eight percent and 74 percent, highlighting the impact of using higher earners to subsidise those earning less.

“We have changed the contribution mechanism and contribution formula---so that we have an equitable contribution mechanism. Every one of us is going to contribute 2.7 percent of their earnings to NHIF so that we can carry this load of NHIF equally,” said President Ruto.

Already, employers have started implementing the new NSSF rates that have seen deductions to staff earning between Sh18,000 and Sh25,000 part with Sh880 a month.

The revised rates for the band have seen deductions for NSSF rise to the Sh1,080 upper limit from the current Sh200. This contribution is matched by the employer.

Through the Finance Bill, Treasury is also seeking to deduct three percent of a worker’s basic salary towards the National Housing Development Fund

While all the workers will see their take-home salary reduced by these changes, highly paid individuals will also pay an extra 35 percent PAYE (Pay As You Earn) on income above Sh500,000.

This will see those earning Sh600,000 in a month cede Sh22,904 of their take-home salary, as the government seeks an additional Sh350 billion in taxes in the upcoming financial calendar.

A big chunk of the foregone cash by those earning Sh600,000 will be contributions to NHIF.

Contributions to NHIF by an individual with a basic salary of Sh600,000 rises by 853 percent to Sh16,200. The current contribution is Sh1,700.

“Those who have been paying Sh500 to NHIF, we will reduce that to Sh300. And for me as President who has been paying Sh1,700, I will be paying Sh27,500,” said Ruto.

The Kenya Kwanza administration reckons that increased savings through the NSSF will help not only give workers better returns in their old age but will also provide more local funds from, which the government can borrow.

In the upcoming Financial Budget starting in July, Treasury targets to raise Sh2.89 trillion, an increase from the current ceiling of Sh2.53 trillion.

The government expects collections from income tax—which includes mainly PAYE and corporate income tax paid by businesses—to increase by Sh194.2 billion to Sh1.2 trillion in the financial year ending June next year.

So far a tough business environment has seen the government fall short in the collection of PAYE in the first six months of the current financial year.

By the end of December, the KRA had collected Sh230.9 billion against a target of Sh242.7 billion even as the economy was confronted with shocks such as drought and the war in Ukraine that drove up prices of key raw materials.

The economy grew at a much slower rate of 4.8 percent last year compared to 7.6 percent in 2021.

The slower growth was on account of contraction in the agricultural sector, the country’s biggest employer, as well as the deceleration of almost all the other sectors of the economy.

Read: New digital tax mechanism promises Kenya windfall

“The year 2022 was covered with many persistent negative shocks,” said Professor Njuguna Ndungu, the Cabinet Secretary for National Treasury.

During the release of the 2023 Economic Survey, Professor Njuguna noted that most of the growth last year was pronounced in the service sectors such as hospitality.

The latest changes in the Finance Bill, 2023, if approved by the lawmakers, are likely to add to the inflationary pressure being felt by Kenyans as a high cost of living erodes their purchasing power.

Data from the KNBS showed that inflation wiped out the 5.6 percent salary increase offered to private sector workers last year, making it the third year in a row when pay rises lagged behind the soaring cost of living.

Inflation, or the overall increase in prices of commodities over a 12-month period, eased to 7.9 percent last month from 9.2 percent in March on moderation of growth in food prices.

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