How a 30 per cent pay-rise can become 25 per cent
The Sunday Nation
Nairobi,
03 June 2012
A reader who wishes to remain anonymous is wondering whether her employer is cheating her. She writes, “Last month my company promised to increase my salary by 30 per cent by when I got my bank account I found that the increment was less than what I expected.
“I was getting Sh26,600 before and now the salary in my bank is Sh33,300. I was expecting to get an increment of almost Sh8,000 (30 per cent of Sh26,600), that is, a new salary of ShSh34,600.
“Can tell me in simple math whether I am being cheated? My boss said it has something to do with tax brackets but I didn’t understand.”
The amounts that this reader has given appear to be all net salaries, that is, the monies deposited to her bank account. I have tried working backwards to find out what the gross pay was before the increment. In my calculations, I assumed that there are only three deductions in her payslip: the Pay-As-You-Earn tax (PAYE), NHIF and NSSF contributions (Sh320 and Sh200, respectively).
Now since NSSF is a retirement fund, any money contributed to the scheme is not taxed. That is, it must be subtracted from the salary BEFORE beginning the tax calculations. Thus the PAYE tax is calculated on Sh29,800.
At present, the PAYE tax brackets are as follows: earnings up to Sh10,164 are charged at the rate of 10 per cent; from Sh10,165 to Sh19,740 the rate is 15 per cent; from Sh19,741 to Sh29,316 it goes up to 20 per cent; from Sh29,317 to Sh38,892 are charged 25 per cent; finally, for all earnings above Sh38,892, the rate applied is 30 per cent.
I demonstrated how to do the tax calculations in June 2009 so I won’t repeat it here. It turns out that with a gross salary of Sh30,000, our reader’s PAYE was Sh2,848. Add to this the NHIF (Sh320) and NSSF (Sh200) contributions and the total deductions came to Sh3,368. Therefore her net pay came to Sh26,632.
The 30 per cent increment give by the employer was applied to the gross salary; not the net. Thus her pay rose from Sh30,000 to Sh39,000.
Now if you look at the tax brackets you will find that, before the increment, most of the salary fell in the 10, 15 and 20 per cent tax rates. The bulk of extra Sh9,000 falls in the 25 per cent region, and a small amount in the 30 per cent bracket.
As a result, with the new salary of Sh39,000, her PAYE comes to Sh5,098 and the net pay to Sh33,381 (after deducting NHIF and NSSF contributions). That is; the employer is correct and there is no cheating going on.
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