I earn Sh350,000. How do I reduce my tax burden through savings? (Life insurance, private pension etc)
Whilst taxes are an essential component of any functioning economy, they can be a significant expense. It's therefore natural for individuals to want to minimise their tax burden as much as possible.
This can be an effective way to increase one's overall financial well-being.
One of the most effective ways to reduce your tax burden is to contribute to an occupational or individual pension plan.
By contributing to either pension plans, you can reduce your taxable income, which, in turn, will lower your overall tax bill.
In Kenya, contributions to a registered pension scheme are tax-exempted up to a maximum of Sh20,000 per month or Sh240,000 per year.
This means that by investing in a pension plan, you can reduce your taxable income by up to Sh240,000 per year, which can help to lower your overall tax burden.
Life insurance policies
Another way to reduce your tax burden is to invest in life assurance. Life insurance policies are designed to provide financial protection to your loved ones in the event of death or permanent and total disability of the principal member, but they can also serve as a tax-efficient savings vehicle.
Premiums paid on a life insurance policy are tax-exempted up to a maximum of Sh60,000 per year. Depending on the type of life insurance policy you choose, you may be able to deduct your premium payments from your taxable income, resulting in a lower tax bill.
However, the eligibility of this only comes about if the term of your policy is 10 years and above.
Let's say you earn Sh350,000 per month and pay Sh20,000 in life insurance premiums. In this case, your taxable income would be reduced to Sh347,000 resulting in a lower tax bill (due to a 15 percent tax relief on the Sh20,000 insurance premium paid).
It's worth noting that not all life insurance policies offer tax benefits, and as such it's essential to speak with an insurance broker to determine which type of policy is right for your specific needs.
Education policies
Additionally, investing in an education policy can be a tax-efficient way for future education expenses.
Be it your own quest to further your education or having children with a need to plan for their future education, contributions to an education savings plan are tax-exempted at 15 percent of your premium up to a maximum of Sh5,000 per month or Sh60,000 per year.
Mortgage relief
Acquiring a mortgage facility for your own house helps reduce your tax burden as you will enjoy tax relief on the interest to a maximum of Sh25,000 per month or Sh300,000 per annum.
Enrolling in a registered home ownership savings plan also helps you reduce your tax burden as the deposits into the savings plan shall be exempted from tax up to a maximum of Sh4,000 per month.
It is essential to speak with a financial advisor or tax professional before making any significant financial decisions. Every individual's financial situation is unique, and what works for one person may not work for another.
By working with a professional, you can ensure to make the best financial decisions for your specific needs and goals.
Mr Oduor is a financial communication specialist at Zamara, he can be reached via [email protected]
