EMPLOYMENT INCOME

1. Introduction
This is one of the separate sources of income by itself. An employee is normally taxed on cash and non-
cash payments arising from employment. Employment income is one of the most common sources of
income and therefore requires particular attention.

The source of income is determined by residential status of the employee and where he was recruited
from. In Kenya, a resident employee is taxed on employment income earned from any place in the world
so long as he was recruited in Kenya by a resident employer or a permanent establishment in Kenya of a
non-resident employer.

The ITA does not define employment but covers any relationship between master and servant arising
from a contract or agreement. The scope of the Act extends to services rendered by one person to
another other than in the course of employment or as part of business.

2. Employer: An employer is taken when necessary to include:

(a) Any person having the control of payment of remuneration of another.
(b) Any agent, manager, or other representative in Kenya of any employer who is outside Kenya.
(c) Any paying officer of the government or other public authority.
(d) Any trustee or insurance company or any other body paying pensions.

An employer will thus include a manager of a branch or a firm. The employer must decide which
offices shall be the paying point and ensure that those in charge of the paying are adequately
instructed of their duties under PAYE scheme. The paying point is the place at which the
remuneration is paid.

3. Employee: This word is defined as inclusive of any holder of an appointment of office, whether
public or otherwise, for which remuneration is payable. “Employee should be read as including for
example minister, chief, any public servant, company director (resident or non-resident), secretary,
etc., in addition to those more commonly known as employees. It includes an employee who retires
on pension and stays in Kenya where the registered pension fund benefits exceed Kshs. 180,000 per
annum.

4. Gains and Profits from Employment: Gains /profits from employment or services rendered will
include both cash and non-cash benefits.

(i) Cash Benefits

(a) Wages, salary, leave pay, sick pay, payment in lieu of leave, directors' fees and other fees,
overtime, commission, bonus, gratuity or pension whether payable monthly or at longer or
shorter intervals.
(b) Cash allowances, e.g. house or rent allowance, telephone allowance, round sum allowance
etc.
(c) The amount of any private expenditure of the employee paid by the employer otherwise than
as a loan, e.g. house rent, grocery bills, electricity, water, telephone bills, school fees,
(d) Amount of subsistence, travelling, entertainment or other Allowance, however where the
Commissioner is satisfied that subsistence, travelling, entertainment or other allowance
represents solely the reimbursement to the recipient of an amount expended by him wholly
and exclusively in the production of his income from the employment or services rendered
then the calculation of the gains or profits of the recipient shall exclude that allowance or
 expenditure;
(e) Excess per diems. Cash allowances to employees working outside their work stations
popularly known as per diems in excess of Sh.2000 are taxable.
(f) Tax free remuneration. There are certain instances when an employer wishes to pay his
employees’ salaries negotiated net of tax. In such circumstances, the employer bears the
burden of tax on behalf of such employees. The tax so paid by the employer for the employee
becomes a benefit chargeable to tax

(ii) Non-Cash Benefits:

(a) Facilities such as free transport, gifts to employees, free meals etc.
These are benefits, advantages or facilities of whatever nature that arise by virtue of one’s
employment. The value of benefits in kind that are taxable should aggregate to Kshs. 3,000 p.m.
with effect from 1.1. 2006. (Previously it was Kshs. 2,000 p.m.).

(b) Provision of Servants

These include a house servant, a cook, watchman, gardener, an Ayah (maid), bodyguard,
messenger, chauffer etc. The values of such benefits are taxed on the higher between the market
cost and actual cost incurred by the employer.

(c) Provision of Services

These include water, telephone, electricity, furniture, alarm system etc. The CDT quantifies the
value of such benefits to the employee through the quantified benefits tables. Where the
quantified benefit is different from the actual cost of providing the service by the employer, the
employee is taxed on whichever is the greater.

Prescribed benefit rates of services provided by employer Monthly

Service Rate
(i) Electricity (Communal or from a generator) 1,500.00
(ii) Water (Communal or from a borehole) 500.00
Agriculture employees: reduced rates of benefits
Service Rate
(i) Electricity (Communal or from a generator) 900.00
(ii) Water (Communal or from a borehole) 200.00

(d) Provision of Motor Vehicles

Previously, the Commissioner quantified the benefit in respect of m/vehicles based on the
cylinder capacity. The higher the cc rating the greater benefit presumed. From 1 st January 1996,
taxation of a motor vehicle is based on the greater of: -
- The Commissioners quantified benefit based on cc rating; or
- A percentage of the initial cost of the motor vehicle, 2% p or 24% p.a.
 Prescribed benefit rates of motor vehicles provided by employer
(i) Saloons, Hatch Backs and Estates(prescribed cc) Monthly Annual
Up to 1200 cc 3,600 43,200
1201-1500cc 4,200 50,400
1501-1750cc 5,800 69,600
1751-2000cc 7,200 86,400
2001-3000cc 8,600 103,200
Over 3000cc 14,400 172,800
Pick up and panel vans (unconverted)
Up to 1750cc 3,600 43,200
Over 1750 cc 4,200 50,400
Land rover 7,200 86,400

(e) Housing/ Quarters Benefit: Housing benefit arises where an employee is housed by his/her
employer in a house either owned by the employer or the employer pays rent directly on account
of a house occupied by the employee. To determine the amount of housing benefit that accrues to
an employee, employees are classified into the following categories:-

- Ordinary Employees: In this case, the housing benefit shall be taken to be 15% of
employment income (cash + non cash benefits), less nominal rent paid by employee towards
the house.

- Agricultural Employees Including Whole Time Service Directors (WTSD): An

agricultural employee is one whose terms and conditions of employment require that he
resides within a plantation or farm. The housing benefit shall be 10% of employment income
(cash + non-cash benefits).

- Employees Earning over Kshs. 50,000 per Month: As from 1st Jan 1995 where an employee
earns income in excess of Kshs. 50,000 p.m. (Kshs. 600,000 p.a.) the housing benefit shall be
the greater of: The market rental value of the house and; and the computed housing benefit
based on type of employee.

- Employees Provided with Housing and Free Meals: Where an employee is accommodated
within the hotel premises and takes his meals there, the value of the benefit shall be 10% for
accommodation and 10% to cover meals giving a total of 20% of employment income (cash +
non-cash benefits).

Note: With effect from June 1998, the Commissioner introduced new provisions regarding the
value of housing for whole time service directors and directors other than WTSD. Quantification
of housing benefit for other employees remains as before.
 Whole Time Service Director: Means a director of a company who is required to devote
substantially the whole of his time to the service of that company in a managerial or technical
capacity and is not the beneficial owner of, or able, either directly or through the medium of
other companies or by any other means, to, control more than 5% of the share capital or
voting power of that company.

The housing benefit shall be taken to be 15% of employment income provided that:-
- If the employer pays rent under an agreement not made at arm’s length with a third party
the value of the quarters shall be the fair market rental value of the premises in that year
or the rent paid by the employer whichever is greater; or
- Where the premises are owned by the employer the fair market rental value of the
premises shall be the taxable benefit.

 Directors Other than WTSD: The housing benefit shall be 15% of total income (income
from all sources), provided that: -
- If the employer pays rent under an agreement that is not made at arm’s length with a
third party, the value of the quarters shall be the fair market rental value of the premises
in that year or the rent paid by the employer, which over is the greater;
- Where the premises are owned by the employer the fair market rental value of the house
shall be taxable amount.

Note: The fair market rental value should be taken to mean the amount of rent that the
premises would attract if it were floated in the open market for leasing. An independent
registered land valuer should carry out the valuation.

 Additional Notes in Respect of Housing Benefit

- Where the employer provides an employee with a house for only part of a year, the
housing benefit shall be reduced proportionately to a period of occupation.
- Where an employee pays nominal rent towards a house provided by the employer, such
amount will be deducted against the housing benefit.
- Where an employee occupies only part of a house provided by an employer, the housing
benefit shall be computed on a basis, which the Commissioner thinks will be just and
equitable.
- House allowance should be taxed as a cash allowance but not be used in the computation
of housing benefit.

 Exceptional Cases on Taxation of Housing Benefits: There are certain instances that would
provide a strong case for employees not to be taxed on the benefit of a house provided by the
employer. These include;
- Where a house is provided as a basis for effective performance of the duties of an
employee e.g. a house provided to a building caretaker.
- Where housing is of necessity to an employee’s proximity to their work e.g. matron of a
school, captain of ship etc.
- Where an employee is under a form of threat or where the accommodation is part of a
security detail e.g. the occupation of soldiers within the barracks housing provided to
researchers in undisclosed residences.
(f) Low Interest/Interest Free Loan Benefit:
When an employer provides a loan to an employee or a relative of an employee and charges interest,
which is below the Commissioner’s prescribed rate of interest, then the difference between the
prescribed rate and employer’s rate shall be taken as a benefit to employee. This is known as fringe
benefit and taxable on the employer not the employee.

5. Non-Taxable Benefits from Employment

i. Passages to expatriate staff

When an employer himself pays for or reimburses the cost of tickets for passages, including
leave passages for his employee and family, the value of the passages is a non-taxable benefit of
the employee provided:
 the employee is recruited outside Kenya
 the employee is in Kenya solely for the purpose of serving his employer and
 the employee is not a citizen.
Where, however, such employee receives a cash sum either periodically or in one amount which
he is free to save or spend as he chooses or for any other purposes and for the expenditure of
which he does not have to account to the employer, the amount received is a taxable cash
allowance.
ii. Medical services and medical insurance
Where an employer provides all its employees (including directors) with free medical services or
free medical insurance, the value of such medical service or insurance is not a taxable benefit on
the employee.
Please note that:
a. In the case of medical services provided to a director other than a whole time service director
shall be the limit which will be prescribed by the Minister from time to time. The current limit is
Kshs.1,000,000 per year.
b. The medical insurance must be provided by a provider who is approved by the Commissioner
of Insurance.

iii. Employers contributions to registered or unregistered pension scheme or provident

fund
Contributions made by employers on behalf of employees to retirement’s schemes is not taxable
on the employee. However, contributions paid by a non-taxable employer to unregistered
pension scheme or excess contributions paid to a registered pension scheme, provident fund or
individual retirement fund; shall be employment benefit chargeable to tax on the employee.

Other non-taxable benefits

a) Employee staff meals
Staff meals provided by employers to low income employees are tax free.
Note: A low income employee is defined as an employee whose marginal rate of tax on
income does not exceed the rate of 20% (i.e below the 3rd tax band).Free meals offered
to low income employees by the employer within his premises
b) Education benefit extended to low income employee working for educational
institutions provided the courses are pursued in the same institution
c) School fees:
 Education fees of employee's dependants or relatives will not be taxed on the employees
provided the same has been taxed on the employers.

6. Allowable Deductions from Employment Income

(i) Employee’s Contribution to Registered Pension and Provident Fund: The deductible amount will
be the lesser of:
- The actual amounts contributed by employee or
- 30% of the employment or pensionable income; which means all emoluments and benefit subject
to PAYE or
- The CDT’s ceiling of Kshs. 20,000 p.m. (Kshs. 240,000 p.a. from 2006) and was Kshs. 17,500
p.m. (Kshs. 210,000 p.a. up to 2005).

(ii) Registered Home Ownership Savings Plan (RHOSP): A depositor (employee) shall in respect of a
year of income be eligible for a deduction against his employment income in respect of a fund
deposited in an approved institution under the registered home ownership savings plan. In the
qualifying year and in subsequent years of income, deductible amounts are, Kshs. 8,000 p.m. (Kshs.
96,000 p.a.). However, for this deduction to be made;

(iii) National Social Security Fund Contribution: Contributions made to NSSF qualify as deductions as
from 1.1.1997. Where an employee is a member of a pension /provident fund and at the same time the
NSSF, the maximum allowable contributions should not exceed Kshs. 20,000 p.m. in aggregate,
(Kshs. 240,000 p.a. from year 2006)

(iv) Owner Occupier Interest /Mortgage Interest on Owner Occupied Property: The interest paid by
a person /individual on an amount borrowed from a specified financial institution shall be deductible.
The amount must have been borrowed to finance either:
(a) The purchase of premises or
(b) Improvement of premises, which he occupies for residential purposes

The amount of interest allowable under the law must not exceed Kshs.300,000 per year (equivalent to
Kshs. 25,000 per month

RELIEFS
6.1 Personal reliefs
A resident individual with taxable income is entitled to a personal relief of Kshs. 28,800 per
annum (Kshs. 2,400 per month). This is a uniform relief and employers are advised to
automatically grant personal relief to all employees irrespective of their marital status.
Individuals serving several employers qualify for personal relief from only one employer (i.e.,
main employment).
6.2 Insurance Relief
A resident individual shall be entitled to insurance relief at the rate of 15% of premiums paid
subject to maximum relief amount of Kshs. 5,000 per month (or Kshs. 60,000 per annum) if he
proves that;-
- he has paid premium for an insurance made by him on his life, or the life of his wife or of his
child and that the Insurance secures a capital sum, payable in Kenya and in the lawful currency
of Kenya; or
- his employer paid premium for that insurance on the life and for the benefit of the employee
which has been charged to tax on that employee; or
- both employee and employer have paid premiums for the insurance:

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