Housing tax pain deepens as KRA goes for gross pay

The taxman has directed employers to use gross pay when calculating what to deduct from staff salaries as housing levy, revealing the hidden pain for workers in the controversial tax starting this month.

The directive, which has sent shockwaves across human resource departments, means that the Kenya Revenue Authority (KRA) will require that allowances paid to staff such as hardship, travel, airtime and car allowances be included while making monthly computations.

The allowances had been left out in the initial draft Finance Bill, which provided for a housing fund.

The revelation by the KRA will see MPs and other top State officers who make hundreds of thousands in allowances every month become some of the biggest losers as employers recover and remit the backdated taxes from this month.

Employers who were preparing August payrolls on the basis of basic pay have now been left with a bigger hole to fill after the KRA closed the loophole they hoped to use to reduce their tax burden.

“We were not anticipating its application on gross pay. Traditionally statutory deductions on the payroll have been on basic pay. This is an issue and a recent change. That the government is now effecting statutory deductions on gross income has very heavy financial implications on both the employer and the employee,” said Ms Jacqueline Mugo, the chief executive officer of the Federation of Kenya Employers (FKE).

“There is some confusion when they talk about gross pay because when we put it all together it becomes very expensive and that is a matter of concern to us. We had asked that statutory deductions be based on basic pay.”

Read: No housing levy refunds in revised President Ruto tax plan

The KRA clarified on Tuesday that all regular allowances will be put into consideration when arriving at employees’ deductions towards the housing levy introduced through the Finance Act of 2023.

The directive will now cause benefits such as car allowance, travel and commuter allowance, and communication or airtime allowances to be added to one’s basic salary to determine how much their 1.5 percent deduction from one’s monthly pay should go towards the affordable housing agenda.

The employer will also be required to match the employee’s contribution every month, highlighting the burden that lies ahead for employers in the country.

The clarification by the KRA has been necessitated by the fact that the Employment Act of 2007 does not define gross salary yet it is the legislation being relied upon to guide deductions for the housing levy.

But employees have been given some breather when it comes to one-off bonus payments, pension, leave allowance and severance pay, which have been excluded from the computation of the housing levy deductions.

“Gross monthly salary constitutes basic salary and regular cash allowances. These include housing, travel or commuter, car allowances and such regular cash payments and would exclude those that are non-cash as well as those that are not paid regularly such as leave allowance, bonus, gratuity, pension, severance pay, or any other terminal dues or benefits,” the KRA said in the public notice.

The other hidden pain in the housing fund is the gross-on-gross taxation which means that the taxman will use the same gross to calculate the Pay As You Earn, which will be a form of double taxation.

This means that for an employee making a gross monthly income of Sh50,000, his or her new take-home would drop to Sh39,911 from Sh41,457. Initially, those earning Sh50,000 were paying a tax of Sh8,543. This has now increased to Sh10,089 on account of the new taxes. 

For their part, those making Shh100,00 their new take-home will shrink to Sh73,661 from the current Sh76,457.

The deductions will be higher for the bigger pay bands, with those making Sh1 million in a month parting with Sh35,000 more to take home Sh671,215. Before the new taxes employees earning Sh1 million were taking home Sh706,457. This means that KRA, NSSF and NHIF were taking up to Sh293,543. After the new taxes, this cadre of top earners will now be paying a total of Sh328,785.

All employees, whether on permanent and pensionable terms or contract-based engagements, will be required to make contributions towards the Affordable Housing Fund, widening the reach of collections.

The taxman has, however, barred employees from benefiting from the affordable housing relief as provided under Section 30A of the Income Tax Act.

This is in contrast to the former Jubilee administration’s Boma Yangu initiative where Kenyans making savings under registered affordable schemes were allowed to enjoy personal relief, which reduced their total tax liability.

The relief was designed to ensure the government created an incentive for the uptake of the affordable housing programme.

“Taxpayers paying housing levy under Section 31B of the Employment Act are not eligible for affordable housing relief under Section 30A of the Income Tax Act Cap 470,” the KRA said.

The clarification from the KRA comes a fortnight after the State Department of Housing announced the backdating of housing levy deductions to July 1, 2023.

The deductions are to be remitted to the KRA within nine working days after the end of the month in which payment was made.

The Kenya Kwanza government targets collecting Sh83.0 billion through the housing levy in the 2023/24 financial year.

The fact that the taxes will be backdated means that employees should expect a double deduction in the August payslips as employers recover the taxes not collected and pass the current month’s tax.

Employers who fail to remit these funds as provided by the law face a penalty of 2.0 percent of the unpaid funds for every month in which they remain non-compliant.

The housing levies on top of the higher contributions to the National Social Security Fund contributions and the new pay bands and the National Hospital Insurance Fund review will see the take-home for workers shrink further.

Ms Mugo said that the new tax measures are also slowly eroding the purchasing power and exacerbating poverty levels.

“We are seeing a very significant increase in the total wage bill and we could flout the one-third rule as people will not have sufficient take-home pay as is envisaged by law,” she added.

Potentially, this move to tax from the gross pay could also affect the employed through job losses. Some employers told the Business Daily that “the contracts they signed with their staff did not dictate buying them houses”.

Ms Mugo noted that employees were also irked by the mandatory housing deductions as some were already servicing mortgage loans and are over-committed and stretched so thin.

Read: Tax incentives at the centre of affordable housing ambitions

“That conversation [of job cuts] has been there for a long time even before the new taxes were introduced. Employers were already facing a lot of constraints, business is not yet back and as difficult as it is this is, employers are rethinking how to move forward,” she said.

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