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Housing Levy:  What It Is, And Its Impact on Employees and Employers

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Global Payment and Compliance

Housing Levy:  What It Is, And Its Impact on Employees and Employers

This article breaks down the new housing regulations implemented by the Kenyan government, and its immediate implication of employers and employees........

Workpay
March 25, 2024
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March 25, 2024
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Housing Levy:  What It Is, And Its Impact on Employees and Employers

There has been a lot of criticism over the housing levy regulations that the Kenyan government wanted to implement in the Financial Bill 2023. Though The High Court stalled the bill’s implementation, on March 18, 2024, the Affordable Housing Levy Act became law. 

With the bill's implementation already in effect, the Affordable Housing Act has an immediate implication on salaries. Employers and employees must understand the effect of the housing levies on payrolls. In this article, we will look at the housing levy and its impact on the salaries of Kenyans.

What is a Housing Levy?

The housing levy is a 3% deduction on all salaried employees to help pay for affordable housing in Kenya. Hon. President William Ruto signed The Affordable Housing Act into law on 18 March 2024 as part of the government's plan to build up to 250,000 low-cost homes yearly

The levy is a mandatory contribution that both employers and employees make. The law requires every employer to contribute 1.5% of an employee’s monthly gross salary to the levy. Employees will contribute the remaining 1.5% of their monthly gross salary to make up the 3%. 

Additionally, the Act mandates that any unemployed person make a 1.5% contribution of their gross income towards the housing levy. It was introduced after the High Court found it discriminatory for only employed residents to be required to pay the levy. The Act expanded the housing levy base to include non-salaried income residents to address the issue. 

Why is the Housing Levy Important?

The Kenyan constitution gives everyone the right to accessible and adequate housing with a reasonable sanitation standard.

However, quality affordable housing in Kenya is one of the country's biggest issues. With the growing population and urbanisation, many residents do not have access to safe and sanitary housing facilities. 

The government introduced the Affordable Housing Act as a ploy to enhance affordable housing in the country. The levy is meant to raise funds for the building, which was meant to create affordable housing for mid- and low-income communities. Additionally, the levy was meant to stabilise housing market rates and reduce overpricing. 

The levy is meant to provide funds for the government to build about 250,000 houses annually, which will be available to residents at a low cost. Construction of the houses is also meant to address unemployment in the country, offering thousands of jobs to unemployed Kenyans in the process. 

When effectively implemented, the Affordable Housing Act is considered one of the country’s leading economic drivers. 

Housing Levy Contribution

The laws require all individuals who earn a salary to contribute to the housing levy fund. The housing levy is 3% of the monthly gross salary for employees working in an organisation. Unlike employed residents, self-employed people should contribute 1.5% of their overall income towards the fund. Both employers and non-salaried residents should remit the levy by the ninth day of every month

The Kenya Revenue Authority (KRA) is responsible for collecting housing levy. The agency considers gross salary as the basic salary of an employee plus any regular allowances they receive. According to the taxman, regular allowances include commuter, housing, car allowances, and other regular payments apart from the basic income.

Offence and Penalties for Forfeiting House Levy Payments

The law has stringent regulations about people who do not pay the housing levy. Whether a person is employed or has a non-salaried income and does not pay the housing levy by the due date, there will be a 3% penalty on the unpaid amount. These penalties will accrue for every month the levy remains unpaid and will be recovered as a civil debt. 

The Impact of Low Salaries Caused by the Housing Levy

The introduction of housing levies can substantially affect the salaries of many employees. More salary deductions can influence an employee's performance and how well employers can retain their workforce. Let us break down some of these effects:

  1. Reduced Performance

One of the most noticeable effects of reduced salary compensation is reduced productivity. When employees feel that their skills and efforts are taken for granted, they often feel less encouraged to continue working, reducing their performance and productivity. 

  1. Reduce Job satisfaction

More salary deductions can lead to demotivation of employees. It can result in workers getting a negative work attitude, reducing their job satisfaction.

  1. Fatigue

By reducing an employee’s take-home salary, they often feel like they were not adequately compensated for their skill, which can increase their financial stress. Over time, this can lead to employees feeling drained and exhausted. 

  1. Reduced Work Engagement

Employers might notice that most employees do not interact and engage as much in the office. Low salaries can affect the workforce morale, making individuals disengage from work affecting teamwork and collaboration. 

  1. Reduces Employees’ Investment and Saving Ability

The reduction of take-home salaries can also affect an employee’s disposable income. They will have a lower purchasing power, which affects their ability to invest and save the money they acquire. 

  1. High Turnover Rate

Low job satisfaction can also cause a higher turnover rate for the business. Employers might notice more workers quitting and looking for more lucrative opportunities with better salaries.   

Can You opt Out of the Housing Levy?

People can opt out of the housing levy through these ways:

  1. A person can transfer their contribution to their registered retirement scheme, but the Retirement Benefits Authority regulates it. 
  2. A person can transfer their contribution to someone else but must be registered and eligible for affordable housing. 
  3. A person can also opt out of paying a housing levy and get a cash payout, but that money will be taxed. 
  4. Lastly, if a person passes away, they will be automatically opted out of the housing levy. 

In Conclusion

The Housing Levy is a new law in Kenya that requires employees and employers to contribute a small percentage of their salaries to build affordable homes. This levy aims to provide safe and affordable housing for many Kenyans struggling to find suitable homes.

The Affordable Housing Act mandates every individual who has an income in the country must pay the housing levy. Employed residents should pay 1.5% of their monthly gross salary, while their employer matches and contributes 1.5% of each employee’s monthly gross salary. On the other hand, non-salaried Kenyans should pay 1.5% of their gross income. 

Check out our blog to learn more about Kenya’s tax regulations and payrolls.

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