PAYE Guide - Kenya Revenue Authority

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.
(7) LOW INTEREST RATE EMPLOYMENT BENEFIT/FRINGE BENEFIT
When employer provides loan to an employee and charges interest which is below the prescribed
rate of interest, then the difference between the prescribed rate and employer's loan rate is a benefit
from employment chargeable to tax on the employee. The benefit is computed as the difference
between the interest charged by employer and prescribed rate of interest. Low interest rate
employment benefit provisions will also apply to a director and will continue to apply even after the
employee or director has left employment as long as the loan remains un-paid.
However, following amendment to the law by the 1998 Finance Act and introduction of "FRINGE
BENEFIT TAX" which is payable by employers, the determination of the chargeable benefit is now in
two categories i.e. for loans provided on or before 11th June, 1998 and loans provided after 11th June,
1998.
(i) Low Interest Rate Benefit
Employees will continue to be taxed on low interest rate benefit in respect of loans provided by the
employer on or before 11th June, 1998 as before. The low interest benefit chargeable on the employees
is calculated as the difference between interest charged to the employee and the prescribed rate of
interest of 15% per cent, or such interest rate based on the Market Lending Rates prescribed by the
Commissioner; whichever is lower.
Example
- Loan provided by employer - KShs.1,500,000
- Employer's Loan Interest Rate - NIL (interest free)
- Prescribed Rate of Interest - 2 %
Calculation of Low Interest benefit:
- Low Interest Benefit is (2%-NIL=2%): Kshs 1,500,000 x 2%
= Kshs.30,000 per annum
i.e. Kshs.2,500 per month
*The prescribed rate of interest for the year of income commencing on or after 1 st January, 1995 is 15
per cent (15%) or such interest rates based on the market lending rates as the Commissioner may
prescribe from time to time.
SEE APPENDIX 7B for the Rates on Low Interest Benefit.
For the years 2006 and 2008, the Commissioner published the following interest rates:-
(a) January – June 2006 - 8%
(b) July – December 2006 - 7%
1 st Half of the year 2007: January – June 2007 - 6%
2 nd Half of the year: July – December 2007 - 6%
1 st half 2008: January – June 2008 - 7%
2 nd half 2008: July – December 2008 - 7%
(ii) Fringe Benefit Tax Payable by Employer (Section 12B) Effective Date 12 th June, 1998
Tax known as Fringe Benefit tax was introduced by new provisions under Section 12B of the Income
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