Blog

Introduction

Every person has a right to conduct business in Kenya. Some persons conduct business as individuals, sole proprietors or as partners. The income they generate is subject to income tax in Kenya irrespective of the source(s). The Income Tax Act in Kenya Cap 470 does not discriminate the source of any income. Personal income tax (excluding employment income and where a taxpayer is registered under Turnover tax) may be grouped into two.

1. Persons with under kshs 40,000 tax per year.
2. Persons with over kshs 40,000 tax per year

Persons with over kshs 40,000 tax per year

Most businesses are subject to more than kshs 40,000 tax per year of income. In addition to the business income, the taxpayer may have income from other businesses. For example, income from farming, investments etc. In case the person pays more than kshs 40,000 tax per year of income, the person should do the following:

1. Get a personal identification number (PIN) from KRA. Every person that derives in or accrues income from Kenya (among other earning activities) must pay income tax in the country.
2. List all the income earned during a specific year of income from 1st January to 31st December. The income earned is subject to tax irrespective of whether the:
3. Income was paid in kind (barter trade) where a service was provided such as a website was developed or accountancy services were provided.
4. Payment was paid with hard cash.
5. Payment was made electronically via MPESA, Airtel money etc.
6. Payment was received through a cheque or money was transferred to a bank account.
7. List all the expenses incurred in generating the income. However, the expenses must have been incurred specifically in the generation of the income. Examples of such expenses are travel expenses, internet expenses, telephone calls, stationery, meetings etc.
8. Deduct the expenses incurred towards generating the specific income from the income earned.
9. The balance is the profit made before any tax adjustments.
10. In Kenya, the annual income of individuals, sole proprietors or partners is taxed subject to graduated PAYE rates from the lowest 10% to the highest 30 %.
11. The Income Tax Act requires that 100% of the tax must be paid by 31st December every year by the individual income earner. Hence, the taxpayers are expected to pay tax on an instalment basis within the year of income.
12. Failure to make the tax payments by the end of the year of income attract penalties and interest.
13. Annual tax returns must be made by 30th June the following year by the individual income earner.

Instalment tax estimates

The instalment taxes are estimates of the tax amounts payable during the year of income. There are two bases for determining the instalment estimates.

1. Prior year tax – where current year tax is 110% prior year tax.
2. Actual tax payable – where taxpayers determine income and expenses and calculate the tax due.

The individual taxpayer is free to choose any of the methods but must inform the commissioner.

Tax rates

Personal income tax is based on the prevailing PAYE tax rates graduated from 10% to 30%. Therefore, under the current Income Tax Act, the highest individual personal income tax rate income is 30%. This is after subtracting all the deductible expenses.

PAYE bands

The individual taxpayers should use the following current PAYE rates to determine the amount of tax payable for the year of income with effect from 1st January 2021.

Per Year (kshs) Per Month Tax rate

Tax Band Rate of Tax

On the first Kshs 24,000 per month or

Kshs 288,000 per annum 10%

On the next Kshs 8,333 per month or

Kshs 100,000 per annum 25%

On all income amount in excess of Kshs 32,333 per month or

Kshs 388,000 per annum 30%

Personal Relief

The applicable monthly personal relief is Kshs 2,400 per month or Kshs 28,800 annually

The following are the Pension Tax Bands.

Any amount in excess of tax free amounts:

Amount Rate

On first 400,000 10%

On next 400,000 15%

On next 400,000 20%

On next 400,000 25%

On any amount in excess of Kshs 1,600,000 30%

The individual business taxpayer should use the graduated PAYE rates to determine the amount of tax payable in the year of income. Besides, the individual business taxpayer is entitled to personal tax relief of 2,400 per month or Kshs 28,800 per year and any other relief available to individual taxpayers in Kenya such as insurance relief.

Feel free to send us tax and investments in Kenya questions or topics via email taxkenya@gmail.com that you would wish to be covered in this Website.