Basic Pay for PAYE In Kenya - www.taxkenya.com

Introduction

Basic pay to an employee or director is the fixed monthly compensation from the beginning to the end of the calendar month or part thereof.

The basic pay is for the time that the employee or director works for the company under a contract of employment. It is the minimum amount of compensation that a company can award its employees or directors as contractual pay.

In most cases, basic pay in one company is comparable to that in other companies within the same industry. The basic pay is subject to pay as you earn (PAYE) irrespective of the amount.

However, according to the tax law, basic pay is not one single payment item but a mix of several items. The payment items that comprise basic pay vary from company to company.

In most companies, the following are some of the payment items considered part of basic pay for taxation purposes in Kenya.minimum

Salary

A salary is compensation that an employee or director is paid for working from the beginning of the month to the end of the month. If the employee or director works for part of the month, the salary is paid for the days worked. A salary is a minimum payment that an employee or director can be paid for an employment contract. Unless there is an increment, it is a consistent amount throughout the year and the period that an employee is under the contract of employment.

Leave pay

Every employee is entitled to several days in a year as leave days. Leave pay is the payment that an employee or director will receive as compensation for not going on leave. It can be equated to selling leave days to the company. Instead of the employee or director going on their normal annual leave, they are paid for not going on leave.

Payment in lieu of leave

Payment in lieu of leave is paid as compensation for the missed leave days by the employee or director on leaving employment. For example, when an employee or director is leaving employment after one year and in that one year they did not go on leave, they are compensated for the unused leave days. That compensation is referred to as payment in lieu of leave.

Sick pay

When employees or directors fall sick, they go on leave to recuperate. Though the employees or directors do not work, their salaries are not deducted. The employees and directors are paid when they are absent on sick leave. The salaries paid can be equated to sick pay. The pay is subject to PAYE.

Overtime pay

In Kenya, the official working time is eight hours from 8 a.m to 5 p.m, Monday to Friday, with a one-hour lunch break. However, if there is extra work in the company, an employee or director can report to work early before 8 a.m or leave work after 5 p.m. The employee or director can also work over the lunch hour. The employees are entitled to overtime pay. This overtime pay is subject to PAYE unless it is for the low-income earners whose normal income is taxed at the lower PAYE tax band.

Weekend or holiday pay

When there is excess work in a company, employees and directors may be asked to work over the weekends (Saturdays and Sundays) and/or during holidays. The pay may be equal to the per day pay, 1.5 times, two times, or more times the per day salary depending on the company. This pay is considered a component of the basic pay, subject to PAYE.

Payment for working in hardship areas

In Kenya, some areas are considered hardship areas for compensation purposes. For example, areas that do not have developed infrastructure and are challenging to access are considered hardship areas. For instance, some parts of North Eastern Kenya are considered hardship areas. Employees and directors who work in those areas are given extra compensation. The payment for working in hardship areas is considered a component of basic pay, and it is subject to tax in Kenya.

Traveling pay

A company may decide that it will provide traveling pay instead of providing actual transport to its employees or directors. For example, suppose an employee comes from rural areas to work in urban areas. In that case, the company may either refund the traveling costs or send travel money to the employee to assist in the relocation.

Besides, the company may cater to the employee’s or director’s travel to and from work every day. In this case, the employer will give the employee or director money towards their travel. The traveling pay is considered taxable compensation subject to PAYE.

School fees

Sometimes, employees and directors want to advance their education. The company may decide to pay the fees for its employees or directors undergoing certain forms of education. This is school fees for formal academic education such as a certificate course, diploma course, undergraduate degree, master’s degree, etc.

This excludes payment for attendance of seminars and conferences, which are not taxable on the employees or directors as long as they are towards improving work performance in the company. The payments are also not made to the employees or directors but to the person providing the services. As far as taxation is concerned, the school fees are considered part of the basic salary and are subject to PAYE.

Club memberships

Some employees or directors may be enrolled in various clubs such as health clubs, golf clubs, etc. If the company pays for the club memberships, they are considered components of basic pay in Kenya. All club memberships are treated as personal expenses taxable on the employee. The club membership’s pay is subject to PAYE in total. The justification for this is that all employees or directors do not enjoy club membership.

Magazine subscriptions

Sometimes, employees or directors who are members of certain professional clubs subscribe to various magazines to advance their knowledge for better performance at work. When the company pays for the employee’s or director’s magazine subscriptions, the subscriptions are considered compensation to the employees or directors and are subject to taxation. The justification for this is that all employees or directors do not get the magazines to read.

Commissions

Some companies award their employees or directors for bringing in extra business, such as closing a business deal, generating business under challenging areas or situations, or selling a company’s products beyond the expected sales. The employees and directors are compensated with commissions for the extra work.

The companies do this to motivate the workers. They also consider that if a person who is not an employee of the company does the same thing, they would be compensated and subjected to tax. Therefore, any commissions to employees or directors are considered part of the basic pay and are subject to PAYE in Kenya.

Bonus

When companies make profits in particular years of income, the management may award the employees or directors with bonuses. The bonuses are normally awarded after the closure of the financial year. By then, the company can determine the profits made, profits to award a bonus, profits to distribute as dividends, and profits to retain in the company. The bonuses to the employees and directors are considered part of the basic pay in the month they are awarded. Bonus is subject to PAYE in Kenya.

Lump-sum payments

Sometimes, employees and/or directors are compensated a lump sum amount. In Kenya, any lump-sum payments to employees or directors must be reported to the Commissioner within 14 days of payment. Lumpsum payments are made:

In continued employment.
On termination of employment.

Only in those two instances can a person be compensated in a lump sum.

Lump-sum payment in continued employment

There are several reasons why lump sum payments are made in continued employment. The following are some of the reasons:

Compensation for the previous underpayment.
Negotiated pay through industrial actions (e.g., doctor’s or lecturer’s strike).
Industrial courts awards.

The lump-sum payment is considered a component of the basic pay. Therefore, the lump sum payment is taxed at the prevailing PAYE tax rates. The lump-sum amounts are added to the basic pay and the total taxed as compensation for that month.

Gratuity or compensation for loss of office

When employees or directors leave office, they are compensated in some companies. The compensation usually is a lump sum payment. PAYE is deducted from any lump sum payments as gratuity or compensation for loss of office.

The payments must be reported to the Commissioner within 14 days after payment. The lump-sum payments are a result of termination or loss of employment. There are two types of income that can be paid to an employee or director in lump sum as compensation for loss of office.

a) Earned income

The employee or director is compensated for the years worked. For PAYE purposes, the lump sum payment is spread backward for four years according to the annual incomes of the employee or director. Any balance is treated as earnings in the 5th year.

Besides, the lump sum payments are added to any other income in those years, and the tax is calculated. The applicable PAYE rates in those years are used. The PAYE already paid is deducted from the established PAYE amount, and the balance is remitted to KRA during the next PAYE payday.

b) Unearned income

The employee or director is compensated for the years of not working. The years are not worked because the contract is terminated before it expires. There are three methods of spreading compensation depending on the three most common types of work contract in Kenya:

i) Specified term contract with compensation

In this type of work contract, a formal employment contract exists with a specific contract period. Besides, there are specific terms of compensation for the employee or director. The lumpsum payment is spread forward and taxed evenly over the unexpired period of the contract using the current applicable PAYE rates.

ii) Unspecified term contract with compensation

In this type of work contract, the employee or director does not have a specific term (period) contract. However, the provisions for terminal payment on termination of the work contract are specified. The lump-sum payment is spread forward and taxed in the three years immediately after the year of work contract termination. The applicable PAYE rates are the current rates. Annual earnings are used to determine the PAYE due.

iii) Unspecified term contract with no compensation

In this type of contract, there is no specified term or provision for compensation on termination of the work contract. Therefore, any compensation is treated as having accrued in the three years following termination of the work contract. Hence, any compensation is spread evenly in the three years immediately following the termination of the work contract. The PAYE rates applicable in those years are used to calculate the tax payable.

Obligation to deduct PAYE on termination of a work contract

Obligation to deduct PAYE on termination of an employee’s or director’s work contract does not depend on any of the following: