How new tax bands will affect your income in 2017
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
01 January 2017
Many readers have asked me this: “Is it true that PAYE tax rates will be
reduced by 10 per cent from January 2017?” The answer is an emphatic NO!
The taxes rates are not being reduced, but the method of calculation
will change and the effect will be a reduction in the amount payable to
the taxman.
First of all, let me dispel the common misconception that high income
earners pay 30 per cent tax. That is also not true: there is no
individual taxpayer in Kenya who pays that much tax. The
misunderstanding arise from the fact that many people do not know how
taxes are calculated – a very sad state of affairs indeed! How can you
not be interested in knowing how the government takes your money? Isn’t
it that height of irresponsibility?
There are five tax bands in Kenya: 10%, 15%, 20%, 25% and 30%.
Currently, the first Sh10,164 is charged 10% tax; the next Sh9,576 (that
is, fromSh10,165 to Sh19,740) is taxed 15%; the rate for the next
Sh9,576 (that is from Sh19,741 to Sh29,316) is 20%; the next Sh9,576
(from Sh29,317 to Sh38,892) is charged 25%; after that, any amount from
Sh38,892 attracts 30% tax.
So, if you earn Sh40,000 per month only Sh1,108 (that is Sh40,000 –
Sh38,892) will attract the 30% tax; not the entire Sh40,000. For this
income, the first band attracts Sh1,016.40 tax (10% of Sh10,164); for
the second band it is Sh1,436.40 (15% of Sh9,576); the third band is
taxed Sh1,915.20 (20% of Sh9,576); the fourth band is charged Sh2,394.00
(25% of Sh9,576). Finally, the top Sh1,108 is charged 30%, that is
Sh332.40.
These amounts from each tax band are then added together to get the
total tax. The answer is Sh7,094.40. This is much less than what you
would get if you simply calculated 30% of Sh40,000 (= Sh12,000).
There is still one more step remaining before getting the final tax
payable. Every individual taxpayer (that is, not companies) qualifies
for tax relief of Sh1,162 per month. This is subtracted from the above
calculation bringing the net tax payable to Sh5,932.40.
So what will happen from January 2017? First, the tax relief will be
increased to Sh1,280 per month. Next, the 10% tax band will cover income
up to Sh11,180 per month. From there, the remaining bands will increase
by Sh10,533.50 up from the current Sh9,576. Thus; from Sh11,181 to
Sh21,714 will be charged 15%; from Sh21,715 to Sh32,248 will attract
20%; from 32,249 to Sh42,782 will be taxed 25%; and any income above
Sh42,783 will be charged 30%.
So, for a person earning Sh40,000 per month, none of that income will
fall into the 30% band. The top rate for this income will be 25% and
only Sh7,751 (= Sh40,000 – Sh32,249) will attract that tax.
The corresponding taxes for each band will be Sh1,118 (for the 10%);
Sh1,580.10 (for the 15%); Sh2,106.80 (for the 20%); and Sh1,937.75 for
the 25% band. Adding all these values makes a total of Sh6,742.65.
Deducting the Sh1,280 personal relief leaves a net tax of Sh5,462.65.
This is Sh470 less than the current value. It is certainly not a 10%
reduction.
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