Optimising tax critical in financial planning to withstand life events

The end of the year invites a time of reflection as individuals and organisations take stock of the year and prepare to start the new year with renewed vigour and enthusiasm.

Amid various economic and social challenges, it’s inherent for human beings to pursue goals that give them personal satisfaction. Additionally, the passage of time brings with it life events through individual choices and decisions or the natural cycle of life taking shape.

One of the key aspects of personal goals is financial matters.

This encompasses different aspects of protection, growth and stability, among others. The evolving nature of the global and local job environment has led to the emergence of freelancers, remote workers and an increase in independent consultants.

Limited employment opportunities have also contributed to a substantial number of people pursuing entrepreneurship opportunities. Notably, in Kenya, the informal sector has, over the years, dominated the number of new jobs created by the economy.

The tax environment has also been evolving and provides some incentives and opportunities for persons in formal employment, informal employment, as well as entrepreneurs, to optimise their financial plans. It is also notable that the country has a sizeable number of family-owned businesses ranging from small-scale enterprises to conglomerates.

The creation, preservation, and transition of wealth across generations requires proactive and intricate planning. In realisation of the fact that taxation could be a major hindrance during inheritance and estate planning, the government has provided various tax incentives or exemptions that can assist individuals and families in personal estate planning. It is, therefore, incumbent on individuals to proactively identify these opportunities.

Some of the other notable aspects include revised tax deductions that are available to individuals. For instance, there was an increase in the allowable pension contribution from Sh20,000 to Sh30,000 per month.

Contrary to the common misconception, the benefit is available to all individuals and not just employees.

For individuals operating businesses either alone, as a family, or with business partners, and those with a sizable portfolio of assets, there are various tax aspects that they need to consider to ensure the efficiency of their operations.

By and large, the law has considered various phases of life of an individual or a business that may trigger a tax incidence. This includes reorganisation of a business, separation or divorce of spouses, inheritance, family succession, and demise of a proprietor, among others.

The law seeks to ensure that most of these life events that may trigger material tax consequences are tax neutral, particularly considering that they are not driven by a profit motive.

It is prudent for individuals and affected persons to evaluate each life event against what the law provides in relation to taxes to possibly withstand such life events with minimal tax costs.

The allowable deduction on mortgage interest deduction equally increased from Sh300,000 to Sh360,000 per annum.

As the government rolls out the Affordable Housing Programme to increase home ownership, mortgages and construction loans remain a viable route to home ownership.

The benefit is available to all individuals taking loan facilities to finance the construction or purchase of houses from a range of qualifying financial institutions including banks and Sacco’s.

Contributions to a post-retirement medical fund are also deductible upto Sh15,000 per month.

Equally, insurance relief on premiums paid towards education, health and life insurance is allowed upto Sh5,000 per month. It is evident that medical costs consume a substantial proportion of retirees’ income due to a combination of high medical costs and vulnerability due to old age.

Robert Maina is an Associate Director at Ernst & Young LLP (EY). The views expressed herein are not necessarily those of EY.