In Kenya, statutory deductions are mandatory contributions that employers must deduct from their employees’ wages or salaries and remit to various government bodies. These deductions are a legal requirement, ensuring that employees contribute to social welfare programs, taxes, and other statutory obligations as stipulated by Kenyan law. For employers, understanding and complying with these requirements is crucial to avoid legal penalties, interest charges, and compliance issues. This article explores the key statutory deductions for employers in Kenya, including their legal framework, calculation methods, and remittance procedures.

Legal Framework Governing Statutory Deductions

The statutory deductions in Kenya are governed by several legal frameworks that establish the obligations of employers. The primary laws include the Employment Act, the Income Tax Act, the National Hospital Insurance Fund (NHIF) Act, the National Social Security Fund (NSSF) Act, and the Industrial Training Act, among others.

The Employment Act, Section 19(1): This section allows employers to deduct specific amounts from an employee’s wage, provided the deductions are for contributions to approved funds or programs that the employee has consented to support. This provision ensures that deductions are lawful and agreed upon by the employee.

Income Tax Act, Cap 470: This act governs the Pay As You Earn (PAYE) tax, which is deducted from an employee’s salary and remitted to the Kenya Revenue Authority (KRA). PAYE is a significant source of government revenue and plays a vital role in the country’s taxation system.

NHIF Act, Cap 255, and Act No. 9 of 1998: These laws establish the National Hospital Insurance Fund, which provides health insurance coverage for salaried employees. Employers are required to deduct NHIF contributions from their employees’ salaries and remit them to the NHIF.

NSSF Act No. 45 of 2013: The NSSF Act mandates employers to deduct contributions from employees for social security purposes. These contributions provide financial protection for employees and their dependents in the event of retirement, disability, or death.

Industrial Training Act (Amendment) 2022: This act requires employers to contribute to the National Industrial Training Authority (NITA) levy, which funds industrial training and skills development in Kenya.

Key Statutory Deductions in Kenya

The following are the primary statutory deductions that employers in Kenya are required to manage:

• Pay As You Earn (PAYE)
• National Hospital Insurance Fund (NHIF)
• National Social Security Fund (NSSF)
• National Industrial Training Authority (NITA)
• Housing Levy

1. Pay As You Earn (PAYE)

PAYE is a method of tax collection where employers deduct income tax from their employees’ wages or salaries and remit it to the Kenya Revenue Authority (KRA). This deduction is mandatory for all employees earning Ksh 24,000 or more per month. The PAYE system ensures that employees pay their income tax progressively based on their earnings.

• PAYE Calculation: The PAYE tax rates are structured in bands, with different percentages applied to different portions of an employee’s income:
  
  • 10% on the first Ksh 24,000
  • 25% on the next Ksh 8,333
  • 30% on income exceeding Ksh 32,332
• Remittance Procedure: Employers must remit PAYE deductions to the KRA on or before the 9th of the following month. Failure to comply results in penalties and interest charges, making timely remittance crucial for maintaining compliance.

2. National Hospital Insurance Fund (NHIF)

The NHIF provides health insurance coverage for employees and is funded through monthly contributions deducted from salaries. The NHIF Act mandates these contributions, which vary based on the employee’s income.

NHIF Contribution Rates: NHIF contributions are graduated, with employees earning less than Ksh 6,000 contributing a minimum of Ksh 150, while those earning Ksh 100,000 or more contribute a maximum of Ksh 1,700. The NHIF also introduced a 15% insurance relief, calculated as 15% of the total insurance premiums plus NHIF contributions. However, this relief is capped at Ksh 5,000 per month or Ksh 60,000 per year.

Remittance Procedure: Employers must deduct NHIF contributions from employees’ salaries and remit them to the NHIF by the 15th of the following month. The contributions provide access to various healthcare services for employees and their dependents.

3. National Social Security Fund (NSSF)

The National Social Security Fund (NSSF) in Kenya operates on a tiered contribution system, meaning that the percentage contributed depends on the employee’s monthly salary. Below is a breakdown of the contribution tiers:

New Rate:

• Tier 1

• • Applicable Salary Range: Up to Ksh 7,000
  • Contribution Rate:
    • Employee: 6%
    • Employer: 6%
  • Total Contribution: 12% of the pensionable earnings.

• Tier 2

• • Applicable Salary Range: From Ksh 7,001 to Ksh 36,000
  • Contribution Rate:
    • Employee: 6%
    • Employer: 6%
  • Total Contribution: 12% of the pensionable earnings.

• Remittance Procedure: Employers must remit NSSF contributions to the NSSF before the 9th day of the ensuing month. 

4. National Industrial Training Authority (NITA) Levy

The NITA levy funds industrial training and skill development programs in Kenya. All employers, including those with casual employees, must pay the NITA levy at a rate of Ksh 50 per employee per month.

Remittance Procedure: Employers must remit the NITA levy to the Kenya Revenue Authority (KRA) by the 5th of the following month. The funds are used to subsidize the cost of training, ensuring that employees receive the necessary skills for their roles.

Benefits of NITA:

• Employers can receive full or partial reimbursement for training costs.
• Compliance with legal requirements.
• Access to skilled and trained personnel.

5. Housing Levy

The Housing Levy establishes contributions to the National Housing Development Fund. Both employers and employees would contribute 3% of the employee’s salary towards this fund. The levy aims to finance affordable housing initiatives in Kenya.

Compliance and Penalties

Employers must ensure that they comply with the statutory deduction requirements to avoid penalties and interest charges. The Kenya Revenue Authority (KRA) and other relevant bodies have strict enforcement mechanisms, including audits, assessments, and legal actions, to ensure compliance.

Penalties for Non-Compliance:

Pay As You Earn (PAYE)

Penalties for Non-Compliance:

• Late Filing of PAYE Returns:
  • Penalty: 25% of the tax due or a minimum of Ksh 10,000, whichever is higher.
• Late Payment of PAYE Tax:
  • Penalty: 5% of the tax due, plus interest at the rate of 1% per month on the outstanding amount.
• Failure to Deduct PAYE:
  • Penalty: 10% of the amount that should have been deducted.

National Hospital Insurance Fund (NHIF)

Penalties for Non-Compliance:

• Late Payment of NHIF Contributions:
  • Penalty: 5% of the amount due, plus interest at the rate of 1% per month on the outstanding contributions.
• Failure to Register Employees with NHIF:
  • Penalty: A fine of Ksh 20,000 or imprisonment for up to 6 months, or both.

National Social Security Fund (NSSF)

Penalties for Non-Compliance:

• Late Filing of NSSF Returns:
  • Penalty: 5% of the total contributions due or Ksh 2,000 for individuals and Ksh 20,000 for non-individuals, whichever is higher.
• Late Payment of NSSF Contributions:
  • Penalty: 5% of the amount due, plus interest at the rate of 1% per month on the outstanding contributions.
• Failure to Deduct NSSF Contributions:
  • Penalty: The employer may be required to remit both the employer’s and employee’s contributions, and may face additional fines or penalties as determined by the NSSF.

National Industrial Training Authority (NITA)

Penalties for Non-Compliance:

• Late Payment of NITA Levy:
  • Penalty: 5% of the amount due, plus interest at the rate of 1% per month.
• Failure to Deduct NITA Levy:
  • Penalty: Employers are required to pay the levy based on the total number of employees, and failure to comply may result in fines or further penalties determined by NITA.

Conclusion

Statutory deductions are a critical aspect of payroll management in Kenya. Employers must be diligent in deducting, calculating, and remitting these contributions to the appropriate authorities. By staying informed about the legal requirements and maintaining compliance, employers can avoid penalties and contribute positively to the social welfare system. For specific guidance and up-to-date information, consulting with a tax professional or legal advisor is recommended.