Comprehending Payroll in Kenya
Breathtaking savannas, diverse wildlife, colorful culture – Kenya is all this and perhaps more. It is fast becoming a destination for businesspeople who are looking to invest in an African country that has a great scope for economic growth. As a multi-ethnic and multi-cultural country, Kenya boasts of a growing youthful population and a skilled workforce. This has given rise to a plethora of business opportunities that have made Kenya one of the largest economies in East Africa.
In this article, we highlight some of the important payroll-related information relevant to Kenya which is sure to come in handy for any organization looking to set up their office in Kenya or employ Kenyan workforce.
- General Information
The regulations and guidelines surrounding payroll in Kenya come under the Income Tax Act (ITA), Social security and statutory Levies imposed by various authorities including:
● Kenya Revenue Authority (‘KRA’)
● National Social Security Fund (‘NSSF’)
● National Hospital Insurance Fund (‘NHIF’)
● Directorate of Industrial Training (‘NITA’)
The Tax Year in Kenya runs from January 01 to December 31. Income tax rates in Kenya vary by residency status i.e., non-residents pay tax only on income earned within Kenya, while residents pay on income earned worldwide. The highest rate of tax in Kenya for tax resident is 30% and for non-residents is 37.5%.
The method of collecting tax at source from individuals in formal employment is called Pay As You Earn (PAYE). The employer deducts a certain amount of tax from the employee’s salary or wages on each payday and then remits the deductions to the KRA. It is the responsibility of the employer to ensure that taxes are deducted at the source and deposited with the KRA authorities monthly. Also, the employer needs to file a PAYE return (Form P10) by the ninth of the following month.
In a bid to cushion its citizens from the hostile impact of the pandemic on the economy, the Government of Kenya introduced various tax measures in April 2020. The parliament promulgated the Tax Laws (Amendment) Act, 2020 under which tax changes were introduced, such as PAYE changes i.e., the expansion of tax bands and reduction of the highest individual tax band rates from 30% to 25%. Additionally, individuals earning less than KES 24,000 a month were exempted from income taxes.
- Social Security Contribution
Social security in Kenya is regulated and provided for under the NSSF Act and the NHIF Act, amongst others.
National Social Security Fund: NSSF, Cap 258, was established in 1965 through the Act of Parliament Cap 258 of the Laws of Kenya. The Act requires all Kenyans who are over 18 years to register for the program. It provides social security to employees in both the formal and informal sectors of the Kenyan Economy. Participation for both employers and employees is compulsory. Under the NSSF, employees are required to contribute 5% of their salary up to a maximum of KES 200 per month while the employer contributes an equivalent amount for each employee.National Hospital Insurance: Fund To contribute towards universal health coverage in the provision of affordable, accessible, sustainable, and quality health insurance, the Government in Kenya set up NHIF which came into effect on April 01, 2015. Individuals are required to contribute to NHIF on a graduated scale rate between KES 150 per month to KES 1700 per month depending on the Gross pay. There is no employer contribution for NHIF.
A new NSSF legislation (the NSSF Act, 2013) was enacted on December 24, 2013, to replace the NSSF Act, Cap 258. The NSSF Act, 2013 establishes two funds namely, the Pension Fund and the Provident Fund. The new legislation requires the employer and the employee to each contribute 6% of the employee’s monthly pensionable earnings, subject to prescribed upper and lower-earning limits. The NSSF Act, 2013 was initially slated to take effect on January 10, 2014. However, an industrial court ruling suspended the implementation of critical provisions of the Act. The repealed NSSF, cap 258 legislation is therefore expected to remain in force until the suspension is lifted by the court.
The employer is obliged to deposit both employer and employee monthly contributions with the NSSF authorities and submit NSSF Return by the fifteenth of the following month.
By the ninth of the following month, an employer needs to pay the NHIF contribution and file an NHIF return for the contributions withheld from the previous month's employees’ salary. Late payment of any contribution attracts a penalty equal to five times the unpaid contribution.
Statutory Levies: The Government of Kenya has established the Industrial Training Levy Fund to enforce the collection of the training levy called as NITA Levy. For every employee, the employer needs to pay a monthly levy of KES 50 by the end of every month. Failure to pay the training levy attracts a 5% penalty on the amount due.
A monthly NITA Levy Form needs to be submitted by the employer by end of every month along with remittance of the levy.
- Leave entitlement and pay-outs
Annual leave: Employee is eligible to 21 working days of Annual leave with full pay after every 12 months of service, however, he may be entitled to proportionate leaves for each month subject to meeting the specified conditions.
Sick leave: After completion of 2 months of service with an employer, the employee is eligible for sick leave. The first 7 days will be fully paid and Next 7 days will be paid half, subject to meeting the specified criteria.
Maternity and Paternity leave: Subject to the specified notice, a female employee is eligible to 3 months of paid maternity leave. A male employee is entitled to 2 weeks of paid paternity leave.
Apart from the above, employees are also eligible for Compensatory leave, Compassionate leave, and Public Holiday. All the paid leaves are fully taxable as per the ITA.
- Working hours & Overtime
The maximum working hours in Kenya for which an employee can work is 52 hours per week. However, this may differ in the below circumstances:
- For a night work employee, the maximum working hours are 60 hours a week.
- Persons under the age of 16 years, may not work for more than six hours a day (or 36 hours a week).
- Collective agreements may modify the working hours but generally, they provide for weekly working hours of 40 up to 52 hours per week.
Further, including overtime, an employee working hours cannot exceed the following in any period of two consecutive weeks:
- 144 hours for employees engaged in night work
- 116 hours for all other adult employees
Unless otherwise agreed in the employment contract, the employer needs to pay 150 percent of the employee’s normal hourly rate for any overtime worked over the weekdays and twice the normal hourly rate if the employee is requested to work overtime during the weekend and public holiday.
Overtime allowance paid to employees is fully taxable unless the employment income is below the prescribed limit.
- Minimum Wage
Employers need to ensure that the wages paid to the employees should not be less than the minimum wages as prescribed by the authorities. The minimum wage of an employee may depend on the sector, industry, occupation, and the locality of employment. An employer who fails to pay statutory minimum wage or provide a worker with conditions of employment as provided under the Wages Order is deemed to have committed an offense.
- Redundancy Pay
Employees are entitled to termination notice and redundancy payment in case of termination. The redundancy pay should not be less than 15 days’ pay for each completed year of service to the employee declared redundant.
Apart from the above, an itemized payslip is recommended to be provided to an employee. The name of the employer and employee, basic salary allowances, bonuses or rest day pay, deductions made, public holiday pay, etc., if any, are some of the crucial information that needs to be shared on every payslip in Kenya.
Some of the key challenges that employers could face around payroll may include:
● Keeping track of regulatory changes to avoid unnecessary financial and reputational risk.
● Ensuring accuracy and confidentiality of employee information
● Scope for human error
● Irregular salary payment
● Inability to maintain necessary employee records
For seamless payroll compliance in Kenya, organizations must invest in a powerful platform capable of resolving such challenges as well as streamlining operations using automation. Partnering with an experienced global payroll solution provider organization can ensure complete compliance with the relevant regulations and maintain a successful business in Kenya.
About The Author
Manju Shetija heads Payroll Bureau in Ramco and takes care of the Statutory Compliance in the product. She comes with a decade of experience in tax & social security advisory, compliance assignments in PwC