High earners handed tax-free per diems in new Finance Bill

Parliament in session. 

Photo credit: File | Nation Media Group

Employees earning a monthly income of Sh40,000 and above are set for more tax-free per diems, making the highflyers like chief executive officers and senior public officials with fat paychecks some of the major winners in the amendment proposed in the Finance Bill, 2024.

The Bill proposes to amend the Income Tax Act to exempt per diem —or the daily stipend designated to cover expenses incurred by employees during business travel —to five percent of an employee’s gross monthly salary.

The tax exemption on per diem is currently up to Sh2,000 per day, a situation that favoured low earners.

“Section 5 of the Income Tax Act is amended in subsection (2) in paragraph (a) (iii), by deleting the words ‘the first two thousand shillings’ and substituting therefore the words ‘and the employer has a policy on the payment and accounting for subsistence, travelling, entertainment or other allowances, an amount not exceeding five percent of the monthly gross earnings of the employee,” says the Bill.

Although both the public and private sectors have policies on daily subsistence allowance (DSA), popularly known as per diems, the policy is more pronounced in the public sector where it has been responsible for a surge in recurrent expenses.

Senior public officials tend to pocket the highest amounts in per diems, a figure that is reflected in higher spending on their domestic and foreign travels published in reports of the Controller of Budget.

An employee with a gross salary of Sh1 million, for example, will now be eligible for tax exemption on per diem of up to Sh50,000, up from the current cap of Sh2,000.

Employees with a gross monthly income of Sh500,000 will now be eligible for tax-exempt per diem of Sh25,000 while the one earning Sh100,000 will enjoy non-taxed per diem of Sh5,000.

However, an employee earning a gross monthly income of Sh30,000 will see his or her tax-free per diem drop to Sh1,500.

For senior government officials, increased per diem means reduced tax exposure as it reduces the amount of income that will be subjected to tax.

High-ranking government officials, such as the Cabinet Secretaries, can be given per diem as high as Sh194,550 when they visit a country such as Singapore, data from the Salaries and Remuneration Commission (SRC) shows.

An official with a gross monthly salary of Sh924,000 going for a foreign trip to Singapore, for example, is entitled to a per diem of Sh46,200, or, 23.7 percent of the DSA they are entitled to.

For domestic travel, high-ranking officials will receive per diems of up to Sh18,200, while semi-skilled support staff, clerks and assistant officers will receive Sh4,200.

Per diem to the lowest government officials is still higher than that given by most private employers, which restrict per diem at Sh2,000.

Should the proposed changes sail through, they will be entitled to a tax-exempt per diem of Sh9,727.5, up from Sh2,000 per day.

However, for an employee taking home a gross salary of Sh35,000, it means only Sh1,750 would be eligible for tax exemption, down from Sh2,000.

The travel budget for public officials has been on the rise, translating into increased per diems, particularly on foreign trips.

Data from the Controller of Budget shows that the government spent Sh11.4 billion on both domestic and foreign travel in the first half of the current financial year ending in June, an increase from 40.2 percent from Sh8.1 billion.

In October last year, President William Ruto who has been criticised for globe-trotting, having made more than 50 foreign trips since he became president, promised to slash his travel budget by Sh500 million even as he stopped non-essential foreign travel by State officers.

In a communication sent out by the Chief of Staff and Head of Public Service Felix Koskei, the government said the austerity measures would affect delegations accompanying the President, his deputy, the First Lady and the Prime Cabinet Secretary.

The circular said that such foreign travel would only be restricted to officials playing a direct role in the scheduled activities.

The Finance Bill, 2024 also has other amendments that will spare employees’ benefits from taxation offering relief for workers who have seen their pay slips shrink due to increased statutory deductions.

Additionally, the Bill proposes to exempt reimbursement to public officials using their money while performing official duties, a move that some tax experts fear is prone to abuse.

Reimbursements include the purchase of cars as well as allowances.

Fringe benefits such as staff loans of up to Sh48,000 will also be tax-exempt, up from Sh36,000, should lawmakers pass the Bill.
Food from the staff canteen of up to Sh48,000 will also be tax-exempt.

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.