Workers enjoyed Sh300million tax relief on National Health Insurance Fund (NHIF) contributions beginning January last year.
A new report by the National Treasury on tax expenditures—or foregone taxes by the State due to tax reliefs— shows that insurance relief increased significantly by 31.1 percent in 2022 as compared to 2021.
“The increase is attributed to the introduction of relief on NHIF contributions through the Finance Act, 2021, that amended Section 31 (1) of the Income Tax Act to allow for relief on contributions to NHIF, effective from January 1, 2022,” said the National Treasury.
Insurance relief increased from Sh652.75 in 2021 to Sh856.17 last year, boosted by increased contributions to the State-backed insurer.
However, tax expenditure related to personal income tax, which comprises reliefs to taxpayers to encourage savings, home ownership and reduce tax burden, among other reasons, declined by stood at Sh5.2 billion in 2022, a decrease from Sh5.3 billion in 2021.
Besides insurance, other reliefs include those related to persons with disabilities (PWD), and mortgage relief among others.
With the relief, employees who pay a maximum of Sh1,700 per month get back Sh255 following amendments to the law passed in July through the Finance Act, 2021.
The relief is aimed at encouraging more Kenyans to enroll with the national insurer and boost the State’s bid to provide universal healthcare.
Previously, NHIF has been treated as a deduction by accountants while preparing the monthly payroll.
Tax experts note that while this is still a statutory deduction, it is now treated as a tax relief.
“This means, it reduces the PAYE that is payable to the Kenya Revenue Authority. In the long run, the taxpayer’s take-home pay is expected to increase, depending on the scale of your NHIF contributions,” said Ronalds LLP, an accounting firm, in a note.
Take-home income
Contributions to NHIF are, however, expected to rise following the proposal in the Social Health Insurance Bill, 2023 to have graduated contributions pegged at 2.75 percent of gross monthly pay capped at a maximum of Sh5,000.
These deductions will further cut the take-home income for Kenyan workers whose monthly earnings have been hit by the housing tax and increased contributions to the National Social Security Fund (NSSF).
An earlier proposal in the Social Health Insurance Bill, 2023 to have graduated contributions pegged at 2.75 percent of gross monthly pay would have seen high-income earners pay upwards of Sh22,000 a month.
Under the State-backed Social Health Insurance Bill, 2023, UHC will be modelled on three separate funds—one for preventive and primary health care, another for primary referrals, and a third covering treatment of chronic diseases.
NHIF’s revenues from premiums are likely to take a hit from the relief and pile pressure on its ability to fund the treatment of diseases amid the rising cost of hospitals.
The State insurer collected premiums worth Sh78.84 billion in the year to June 2022 against the targeted Sh90.57 billion and has defaulted on paying hospitals for services offered.
