Introduction
Basic pay to an employee or director is the fixed monthly payment from the start of the calendar month to the end of the calendar month or part thereof.
The basic pay is for the time the employee or director works for the company.
It is the lowest amount of compensation that a company can award its employees or directors as contractual pay. Basic pay in one company is comparable with other companies within the same industry. The basic pay is subject to pay as you earn (PAYE).
However, basic pay is not one single item but a mix of several items. In most companies, the following are some of the items that are considered part of basic pay for taxation purposes in Kenya.
Disclosure: This website receives compensation from companies whose adverts appear here. We only promote products that we have used. We are an independent website, and any opinions expressed here are our own. To access post and affiliate disclosure, click HERE.
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 bare minimum that an employee or director can be paid for an employment contract. Unless there is an increment, it is consistent throughout the year.
Leave pay
This 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. Instead of the employee or director going on their normal annual leave, they are paid for not going on leave.
ProfitContact
Bulk messaging software for Whatsup and SMS with autoresponder and chat tools.
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 lost 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 even when they are absent on sick leave. The salaries paid can be equated to sick pay. The salaries are subject to PAYE.
Overtime pay
In Kenya, the working time is eight hours from 8 am to 5 pm from Monday to Friday with a one-hour lunch break. However, if there is extra work, an employee or director can report to work early or leave work after 5 pm. They 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 of 10 %.
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) or during holidays. The pay may be equal to per day, 1.5 times, two times, or more of the salary per day. This pay is considered a component of the basic pay, subject to taxation.
Payment for working in hardship areas
In Kenya, some areas are considered hardship areas for compensation purposes. For example, areas with no developed infrastructure and are difficult to access are considered hardship areas, such as some parts of North Eastern Kenya.
Employees and directors who work in those areas are given extra compensation for working in the hardship areas. The payment for working in hardship areas is considered a component of basic pay, and it is subject to taxation in Kenya.
Traveling pay
A company may decide that it will provide traveling pay instead of providing transport to the employees or directors. For example, suppose an employee is coming from a rural area. 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 the workplace every day. In this case, the employer will give the employee or director money towards their travel. The traveling pay is considered taxable compensation.
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 education such as a diploma course, undergraduate degree, master’s degree, or Ph.D. studies.
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. As far as taxation is concerned, the school fees are considered part of basic salary and are subject to PAYE.
Club memberships
As part of company policy, an employee or director may be enrolled in various 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 memberships pay is subject to PAYE in total.
Subscriptions
Sometimes, employees or directors who are members of certain professional clubs subscribe to various magazines. When the company pays for the employee’s or director’s magazine subscriptions, the subscriptions are considered compensation subject to taxation.
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 its products beyond the expected sales. The employees and directors are compensated with commissions for the extra work.
This the companies do consider that if a person who does not work for the company does the same thing, they would be paid, and their pay would be subject to taxation. Therefore, any commissions are considered part of basic pay subject to PAYE in Kenya.
Bonus
When companies make profits, 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 is in a position to determine its profits, the amount of profits to award a bonus, and the amount of profits to retain in the company. The bonus to the employees and directors is considered part of basic pay, and it is subject to PAYE in Kenya.
Lump-sum payment in continued employment.
Sometimes, employees and/or directors are compensated a lump sum amount. PAYE must be deducted from any lump-sum payments to employees or directors in Kenya. Besides, any lump sum payment must be reported to the Commissioner within 14 days of payment.
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 and lecturer’s strike.)
- Industrial courts awards.
The lump-sum payment is considered a component of basic pay. Therefore, the lump sum 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 is normally a lump sum payment. PAYE is deducted from any lump-sum payments to employees or directors and 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 a lump sum.
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. Previously paid tax is deducted, 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:
1) 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 lump-sum payment is spread forward and taxed evenly over the unexpired period of the contract using the current applicable PAYE rates.
2) 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 three years period 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.
3) Unspecified term and 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.
ALLURE
Rank Any Site AUTOMATICALLY #1 In Google Using GAME-CHANGING Software 100% Done-For-You!
The Easiest Way To Start Your Own SEO Business, Sell SEO Services, Get Free Traffic.
Note
It is important to note that the obligation to deduct PAYE on termination of an employee’s or director’s work contract does not depend on any of the following:
- Voluntary decision to compensate the employee or director.
- Forced decision to compensate the employee or director.
- Written work contract or verbal work contract.
- Provision for compensation in the work contract.
Therefore, basic pay to an employee or director is the salary, and other types of compensation are considered basic pay. However, the above list of basic pay items is not exhaustive. There are other types of compensations that are categorized as basic pay. Besides, other types of compensation may emerge in the future.
PAYE
If the employee or director does not have any other compensation from the employer, the following PAYE tax bands will be applicable.
Per Year (kshs) Tax rate
- On the first 288,000 10 %
- On the next 100,000 25 %
- Income over 388,000 30 %
In addition, personal tax relief is ksh 28,800 per year.
(Source: KRA website 16/2/22)
Disclaimer
This post is for general overview and guidance and does not in any way amount to professional advice. Consequently, www.taxkenya.com, it’s owner or associates do not take any responsibility for results of any action taken on the basis of the information in this post or for any errors or omissions. Kenyan taxpayers must always rely on the most current information from KRA. Tax industry in Kenya is very dynamic.
© Dr Wakaguyu Wa Kiburi
