Kenyan workers are entering the New Year with some financial relief as the pay-as-you-earn (PAYE) tax cuts that the Treasury promised last June come into effect.
The income tax reforms that Treasury secretary Henry Rotich announced in his last budget raised the tax bands by 10 percentage points and increased the monthly personal relief (MPR) from Sh1,162 to Sh1,280, amounting to tax savings of up to Sh609 per month.
The marginal relief, which amounts to Sh7,302 annually, offers some reprieve to workers who have endured the now-repealed tax bands since 2005.
The changes have also raised the tax-free income threshold from Sh11,137 to Sh12,260, largely benefitting those at the bottom of the income pyramid such as security guards, waiters, messengers and cooks.
Analysts have, however, criticised the payroll tax changes, terming them too little and superficial.
“The increase (of the tax bands) does not cater for inflation over these years,” said Ashif Kassam, the executive chairman of advisory firm RSM Eastern Africa.
The changes will benefit those earning Sh50,000 and above the most as they will save Sh609 per month after the MPR defrays part of the tax payable.
Employees with lower salaries will get smaller tax cuts starting, for instance, at Sh181 per month for those earning Sh20,000 whose tax will fall to Sh1,161 from Sh1,342 after the relief is deducted.
A worker earning Sh40,000 will save Sh469.5 per month as the tax payable drops to Sh5,462.9 from Sh5,932.4.
For those earning Sh50,000 or more, the effective tax saving remains constant at Sh609. While low-income earners have benefited less from the changes in the PAYE taxes, they were the only recipients of tax exemption on their bonuses, retirement and overtime pay starting July 2016.
The exemption only applied to workers whose taxable employment income before bonus and overtime allowances do not exceed the lowest tax band, which currently stands at Sh11,180 per month or Sh134,164 annually.
This threshold had risen from Sh10,164 per month or Sh121,968 annually before the new bands come into effect this month.
The first band is taxed at a rate of 10 per cent, with the taxes rising in a series of taxable income that terminates at the maximum of 30 per cent on the highest band (now applicable to those earning more than Sh42,781 a month).
While the bands were increased, the rates applicable were not changed.
Buffer against high living costs
Mr Rotich said the PAYE reforms are meant to cushion workers from the high cost of living and to share the benefits of economic growth more broadly.
The net tax saving has, however, been criticised as too little to boost the welfare of workers.
The maximum tax cut of Sh609, for instance, just covers the electricity bill of a household consuming a modest 50 kilowatt hours (KWh) per month.
As a percentage of gross incomes, the tax saving becomes even more insignificant the higher the pay.
It is just 1.2 per cent of the monthly salary of an employee earning Sh50,000 and 0.1 per cent of someone paid Sh500,000.
Meanwhile, inflation has stayed above the six per cent mark over the past 12 months, standing at 6.35 per cent in December. This means that the tax cuts will hardly amount to a net relief for most workers.
The cost of living outlook has also worsened due to lower-than-expected rainfall, a rise in oil prices and the strengthening of the US dollar, which could accelerate imported inflation.
The tax cuts were also delayed by six months even as higher taxes were applied on a list of consumer goods at rates far exceeding the PAYE benefits.
The list of tax measures that preceded the payroll reforms includes a 10 per cent excise tax on cosmetic and beauty products, the Sh7.2 per litre excise tax on kerosene and a 20 per cent ad valorem tax on motor vehicle imports that immediately inflated the cost of luxury cars.
The schedule for implementation of the new tax measures indicates that the government prioritised collection of more revenue, throwing execution of the tax relief measures to the back banner.
The Kenya Revenue Authority (KRA) is set to lose more than Sh10 billion annually from the PAYE reforms, with the number of formal sector workers, including civil servants, standing at an estimated 2.4 million.
The taxman is, however, also expected to take back some of the tax savings in other levies such as value added tax (VAT) as workers spend or invest their increased incomes.