Employer's guide to pay as you earn in kenya revised edition - 2006

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(19) MONTHLY PAY SLIP Every employer is required to provide each liable employee on payment of remuneration with a written statement showing: (i) (ii) Monthly pay. PAYE Tax deducted. This formal notification is known as the "Monthly Pay Slip" and may be in any form convenient to the employer provided that the above information is given. (20) TAX DEDUCTION CARDS (P.9) This form is supplied to the employer by the Income Tax Office free. A Form P.9 must be prepared for every employee liable to tax (see Part III, paragraph 1). It provides for the recording, of gross pay, housing, benefits, chargeable monthly income, monthly personal relief, and PAYE tax deducted each month throughout the calendar year and payments for past years on the reverse side. Upon final completion after the year end, it is returned to the Income Tax Office, together with P10, P10A and P11 copy as PAYE end of year return. Specimen cards can be found on Appendix No.1A, 3A and 4A. Details of the operation of the card are found on 1C, 2C, 3C and 4C. (21) PROCEDURE ON LUMP SUM PAYMENTS (Gratuities, Bonuses, etc.) A:- Notification Employers are no longer required to notify the Tax Department before making payments of terminal benefits to the employees upon leaving their employment. Every Employer has an obligation under section 37 of the Income Tax Act to recover appropriate tax from any lump sum amount before releasing the difference/balance to the employee. The following is a Guide to Employers on how to compute tax on lump sum payments:- 1. Employment Income Treatment - General Employment income is assessable on accrual basis; that is, over the period it has been earned and become due for payment. The time the Income is received is, therefore, immaterial. Income from employment or services rendered is chargeable to tax under section 3(2)(a)(iii) of the Income Tax Act. This is expounded by section 5(2) which spells out that gains or profits from employment includes: wages, salary, payment in lieu of leave, fees, commission, bonus, gratuity, subsistence, travelling, entertainment or any other allowance received in respect of employment or services rendered. Where an amount is received in respect of employment or a service rendered in a year of income different from the year of accrual, such income is deemed to be income of the year of accrual. However, there is a provision which states that where the year of accrual is earlier than 4 years prior to the year of receipt, the income is to be treated as that of year of income which expired 5 years prior to the year in which the income is received or prior to the year of income in which employment ceased. Example (Terminal Dues): Mr. Peter Bakari left employment in September 2006 after 30 years of service and was paid severance pay/service gratuity of Kshs. 660,000; three months notice pay Kshs. 90,000 and Kshs. 25,000 for his 20 leave days not taken for the year 2005. For the purposes of calculation of tax payable, the service gratuity amount is to be spread backwards and taxed together with income earned in the relevant years but notice pay is assessable in the period immediately after date of leaving employment and pay in lieu of leave should be taxed in the year to which the leave days relate (i.e. 2004, 2005 e.t.c).
The procedure on how tax should be calculated is outlined below:- Year Breakdown of Lump sum payment Taxable Amount Kshs. 2005 - Service gratuity 22,000} - Notice pay 90,000} - Leave pay 25,000} Total Kshs. 137,000 2004 - Service gratuity 22,000 2003 - “ 22,000 2002 - “ 22,000 2001 - 22,000 plus Kshs. 550,000 for * Calculation of Tax on Lump Sum (i) (ii) (iii) (iv) (v) (vi) 2000 & prior years. Take total taxable pay for the year as per the Tax Deduction Card (P9A). Add Lump Sum amount for that year Calculate tax chargeable on the revised total taxable income – (i) + (ii). Use annual individual rates of tax. Deduct personal relief for the year Deduct total PAYE deducted and already paid – (per P9A) The balance is tax payable on the Lump Sum. This method of calculating the tax should be followed for all the years involved so as to arrive at the total tax due and payable on the terminal dues. IMPORTANT - Pay in lieu of notice (i.e. notice pay) is assessable in the period immediately after the date of termination of employment. - Leave pay should be assessed in year to which it relates. - If termination of employment occurs in the course of the year, the portion of lump sum payment for that period is taxable in that particular year. - Calculate the tax for each year using annual rates of tax and then add up tax for all the years involved to arrive at total tax to be deducted from the lump sum payment. It should be noted that any lump sum payment relating to the year of income 2000 and prior years is assessable in 2001 being the 5th year prior to the year of receipt (2006) as per example in Table (i) above). 2. Compensation for Termination of Employment Liability extends to any payment, whether voluntary or obligatory made to a person to compensate him for the termination of his contract of employment or services, whether the contract is written or verbal and whether or not there is provision in the contract for such payment. Following the amendment to proviso (i) and (iii) to section 5 (2) (c) the determination and method of assessing compensation received on termination of contract shall be as follows:-
Page 1 and 2: DOMESTIC TAXES DEPARTMENT EMPLOYER'
Page 3 and 4: DEAR EMPLOYER I wish to appreciate
Page 5 and 6: EMPLOYER’S GUIDE TO “PAY AS YOU
Page 7 and 8: 5. PENSIONERS …………………
Page 9 and 10: 5. DEFINITIONS OF TERMS USED (a) Em
Page 11 and 12: (i) Low Interest Rate Benefit Emplo
Page 13 and 14: d) Any other Employee The taxable v
Page 15 and 16: - Contributions to Individual Retir
Page 17: provided that;- - no relief shall b
Page 21 and 22: B:- Employers are required to submi
Page 23 and 24: PART II WHAT THE EMPLOYER SHOULD DO
Page 25 and 26: PART IV REMITTANCE OF TAX 1. HOW TO
Page 27 and 28: 3. OBJECTION BY EMPLOYEES If an emp
Page 29 and 30: PART VII SPECIAL CASES 1. ARRIVAL,
Page 31 and 32: 7. RECONCILIATION OF RETURNS For th
Page 33 and 34: APPENDIX 2B HOW TO FILL IN THE TAX
Page 35 and 36: APPENDIX 4A TABLE I HOW TO FILL IN
Page 37 and 38: APPENDIX 4C TABLE 1 (TAX FREE REMUN
Page 39 and 40: APPENDIX 7 COMMISSIONER’S PRESCRI
Page 41 and 42: APPENDIX 7A TABLE 2 INDIVIDUAL RATE
Page 43: APPENDIX 7C FRINGE BENEFIT TAX MARK

Employer's guide to pay as you earn in kenya revised edition - 2006

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