Kenya's Recently Passed Finance Bill and How it Will Affect Employees

Kenyans have been buzzing for the past few weeks following the proposed Finance bill, which was finally signed into law on June 26th, 2023, changing the lives of the citizens for the years to come.

The main focus has been on the impact of the finance bill on employees. Kenyan employees have shared mixed reactions over what the finance bill could mean regarding earnings and taxation.

Now that the bill stands, employees and employers alike are advised to familiarize themselves with the taxation and deduction requirements to prevent cases of non-compliance.

So in the spirit of helping employees equip themselves for the changing dynamics and keeping up with the transforming employment sector of Kenya, we provide insight into the recently passed finance bill and how it will affect employees. 

Summary of the Finance Act 2023

The new Finance Act is the first budget for the Kenya Kwanza administration. Per the administration, the finance bill seeks to uphold the Bottom-up Economy by prioritizing five pillars.

The budget is set at 3.6 trillion, spreading Ksh.1.5 trillion to recurrent expenditure, Ksh.986 billion to servicing public debt, and Ksh.718 billion to development. The government has expressed that the goal of the budget is to maintain a delicate balance between stabilizing the economy and servicing the outstanding debt. 

Finance Act Impact on Taxes

The signed Finance Act came with new taxation rates and employee taxing categories. The following are fundamental changes made on taxations that will affect employees:

Housing Tax

Initially, the housing levy introduced by former president Uhuru Kenyatta’s government was set at 1.5% as a contribution. The proposed housing tax per the 2023 Bill proposal was a 3% deduction.

However, the 2023 Finance Act sets it as a tax of 1.5% of the gross pay. It means that if an employee earns a gross pay of Ksh.30,000 monthly, they will contribute Ksh. 450 to the housing levy.

VAT 

The proposed increase in Value Added Tax or VAT on fuel from 8% to 16% was signed into law. There was much controversy on the proposal as fuel prices in Kenya have remained significantly high since 2022.

The new fuel VAT means employees will pay more for fueling cars while commuting to work. Similarly, businesses using petroleum products may face higher fees for the purchase. 

Corporate Tax

Beginning July 1st, 2023, businesses whose turnover is more than 25 million annually will be graduated into the corporate tax category, set at 30%. In the previous case, companies faced a turnover rate of 1%.

It presently affects business owners but could see employees face financial challenges such as downsizing and salary cuts depending on how employers handle the situation. 

PAYE (Pay As You Earn)

The Finance Act has introduced a new Paye tax band of 32.5% for individuals earning a gross salary of Ksh.500,000 to Ksh. 800,000 monthly. Similarly, there is a new 35% band for gross pay above 800,000.

For instance, if an individual earns a gross pay of Ksh.600,000, their PAYE deductions would be Ksh.195,000. Employees in this earning range will part with such amounts as the act takes effect on July 1st, 2023. 

Digital Creators Tax 

The proposed digital content creators' tax was set at 15%, but the finance act set it at 5%. It means digital content creators will remit 5% of earnings from content creation using digital devices. The tax only applies to content creators.  

Strategies for Employees 

While the new taxes imposed on employees are expected to improve the quality of life in the coming years, many have expressed the changes it will have on their pay slips.

Employees may face smaller salaries after deductions and higher prices of goods such as fuel, thus affecting their overall cost of living.

As the implementation date draws near, employees can prepare themselves by making changes to how they use money and employing the following strategies:

Stay Informed

Employers should keep up with information about the Finance Act and what other impact it could have on them.

Employees should seek reliable sources of information such as government websites, news articles, and Workpay's blog. These sources should guide how to brace the changes and the best practices to remain compliant. 

Maximize Available Tax Benefits

Employees should familiarize themselves with the Finance Act's amended deductions, allowances, and exemptions. This way, they can fully utilize eligible tax benefits.

Employees should carefully document and claim them per legislature and on time. It also helps to seek professional guidance to investigate potential tax-saving alternatives, such as using tax-advantaged accounts or increasing retirement plan contributions.

Review and Adjust Financial Plans

Employees should examine their existing financial status in light of the changes brought about by the Finance Act. They should scrutinize their budget, savings goals, and investment strategies to ensure they align with the new tax regulations.

Employees should consider the potential influence on their take-home salary and make any necessary changes to their spending habits or financial goals. For example, public transportation over driving could be a good change for dealing with the new fuel VAT. 

Long-Term Financial Planning

Finally, employees should use the amendments in the Finance Act to evaluate long-term financial goals and aspirations.

Employees need to review retirement plans, insurance coverage, and investing strategies to ensure they align with newly set financial goals.

In addition, it helps to consult with a financial planner or advisor, if necessary, to develop a complete financial plan that considers the impact of the Finance Act on future financial well-being.

Final Observation 

The newly enacted Kenyan Finance Act will affect employees throughout the country. Changes in tax rates, deductions, and allowances will have an immediate impact on employees' take-home pay and overall financial well-being.

Employees must be aware of the provisions of the Finance Bill and understand how they will influence their own money. They can handle the changes more effectively and make educated decisions by maximizing potential tax benefits, evaluating and revising financial plans, and seeking professional help. 

Stay tuned to Workpay's blogs as Kenya takes the first steps into a new financial year with the implementation of the 2023 Financial Act.