The Impact of the Finance Act, 2023: A Comprehensive Guide for Kenyan Employers and Employees

The Kenyan Finance Act, 2023, has brought about significant changes that undoubtedly impact both employers and employees in Kenya. With the Act receiving Presidential assent on 26th June 2023, there are considerable expectations and concerns about its implementation. This article aims to provide a comprehensive guide to help employers and employees navigate through the changes confidently and ensure compliance with the new regulations.

One of the most notable amendments introduced by the Finance Act pertains to pay as you earn taxes (PAYE). The Act proposed the introduction of two tax bands for individuals with higher tax rates. Individuals earning between KES 500,000 and KES 800,000 per month would now be taxable at a rate of 32.5%, while those earning above KES 800,000 per month would face a higher tax rate of 35%. This change could have significant implications for the take-home pay of affected individuals.

Another critical provision of the Finance Act is the introduction of a mandatory housing levy. Under this new scheme, employers are required to deduct 1.5% of employees' gross monthly salary and make an equal 1.5% contribution to the National Housing Development Fund. The funds collected from this levy are intended to finance affordable housing projects across the country.

However, just one day before most of the legislative changes were scheduled to take effect, the High Court granted conservatory orders that suspended the implementation of the Finance Act. The High Court deemed it necessary to preserve the subject matter of the Petition and put the implementation on hold.

Nonetheless, the suspension was short-lived, as the Respondents lodged an appeal with the Court of Appeal. On Friday, 28th July 2023, the Court of Appeal made a ruling that lifted the conservatory orders, reinstating the effect of the Finance Act from 1st July 2023. However, it is important to note that the Petition challenging the Finance Act continues to be under consideration at the High Court.

The lifting of the conservatory order has created a significant challenge for employers, as many of them had already processed their July payrolls using the previous PAYE rates. This has raised the question of whether the July payroll should be computed in accordance with the Finance Act or the previous tax rates.

To address the potential consequences of non-compliance, employers are guided to take specific actions based on their individual situations:

1. Employers who have already processed their July payroll using the previous PAYE rates, can rec-ompute their payroll using the new tax rates introduced by the Finance Act, 2023. If salaries have already been paid out, employers can cover the deficit tax and housing levy due in July and claim the same amount from your employees' August salary. The recovery of this deficit would however be subject to employment law advice.
2. Employers who have already filed their PAYE returns can re-compute their payroll as per the Finance Act rates and submit an amended PAYE return by 9th August 2023.
3. Employers who have neither paid their employees' salaries nor filed PAYE returns can process their July payroll in accordance with the new tax rates, as soon as these rates are configured on the Workpay system.

To navigate these changes seamlessly, Workpay has updated their HR and Payroll system to reflect the Finance Act, 2023. This integration ensures accurate payroll processing and tax deductions for all employers’ and employees’ compliance. 

In conclusion, understanding and complying with the Finance Act, 2023, are essential for both employers and employees to avoid potential penalties and complications. By staying informed and proactive, both parties can navigate these changes smoothly and continue to thrive in their professional endeavors. Employers should take immediate steps to assess their specific circumstances and ensure accurate payroll computation to adhere to the new regulations. 

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