How you are overtaxed when you lose a job or get a pay rise

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

21 June 2009

As noted last week, by filling up the annual income tax returns, you can detect whether you were overtaxed during the previous year. This is quite common, especially when you get a pay rise or lose your job half way through the year. It is not due to any fault of the employer but a consequence of the way in which income tax is administered.

Although the final tax is calculated annually, the Pay-As-You-Earn (PAYE) is computed on a monthly basis. Thus if you are employed from January to June and then lose your job for the rest of the year, you will end up paying more tax than was due.

Let me illustrate using last week’s example: if you earn Sh20,000 per month, we found that your monthly tax is Sh1,328. Now if you worked from January to June, then lost your job and remained unemployed for the rest of the year, the total tax collected for the six months worked would be Sh7,968.

The tax return for the full year, however, yields a very different result. Your total annual earnings are Sh120,000 (20,000 x 6). This amount is in the lowest bracket which attracts 10 percent. Thus your gross tax is Sh12,000.

You then get an annual relief of Sh13,944 and your net tax comes to NEGATIVE Sh1,944. That is, KRA owes you this amount! And that’s not all: While in employment, you had paid Sh7,968 through PAYE deductions. Thus your tax return will show that you are owed a total of Sh9,912 by the taxman.

The other situation that can result in over taxation is when one gets a pay rise. Suppose that instead of losing your job, you were promoted and your salary was increased to Sh40,000 with effect from July. At this level, your PAYE per month will be calculated as follows: 10 percent on the first Sh10,164 (equals Sh1,016.40); 15 percent on the next Sh9,576 (= Sh1,436.40); 20 percent on the next Sh9,576 (= Sh1,915.2); 25 percent on the next Sh9,576 (= Sh2.394); and finally, 30 percent on the remaining Sh1,108 (= Sh332.4).

The gross tax comes to Sh7,094 per month, from which you get the usual Sh1,162 relief and pay Sh5,932. Thus in the six month from July to December, you will pay a total of Sh35,592. Add to this, the amounts paid from January to June (Sh1,328 x 6 = Sh7,968 ) and the annual tax paid is Sh43,560.

When you fill your tax return, this is what you will get: Your annual income was Sh20,000 for six month and Sh40,000 for another six months; this is a total of Sh360,000. Applying the same tax brackets (but annualised), it turn out that you should have paid Sh40,524 instead of the Sh43,560 that was collected through PAYE. Thus KRA owes you Sh3,036.

Clearly then, even if there were no penalties (and they are very severe) it is in the interest of every taxpayer to file their tax-return: You never know, you might just get paid by KRA for doing that paperwork!