The Kenya Revenue Authority (KRA) has raised tax on benefits granted to workers by employers, making it the second successive increase of the charge driven by rising market interest rates.
The authority has hiked the fringe benefits tax to 13 per cent for benefits given to workers for the months of October, November and December 2023.
“For the purposes of Section 12B of the Income Tax Act, the Market Interest Rate is 13 per cent. This rate shall be applicable for the three months of October, November and December 2023,” said KRA in a notice yesterday.
This is an increase from a rate of 11 per cent that employers have been paying on worker benefits for the months of July, August and September 2023.
The levy is paid by employers on certain benefits offered to employees, their families, or other associates such as cheap loans.
For example, some employers offer loans to their employees at interest rates lower than the market rate — a provision that is subject to a fringe benefits tax.
The taxable value of fringe benefits is the difference between the market interest rate and the actual interest paid on the loan.
Fringe benefit tax is provided under section 12B of the Income Tax Act, which became effective on June 12, 1998. Raising the rate of the tax is a blow to workers as employers may raise the rate on cheap loans.
This comes at a time interest rates remain high following the decision by the Central Bank of Kenya (CBK) to increase the base lending rate to 10.50 per cent in June up from 9.50 per cent.
The rate was subsequently retained by the Monetary Policy Committee (MPC) in its meetings in August and October in a bid to tame inflation.
Workers are currently struggling with diminishing incomes even as the cost of living continues to rise. Inflation rose to 6.78 per cent in September driven by an increase in the cost of key commodities such as fuel and electricity.
Employees are being deducted 1.5 per cent of their gross monthly pay for the housing levy. Similarly, President William Ruto this month assented to the Social Health Insurance Bill, 2023.
The Act has raised monthly contributions to the National Health Insurance Fund (NHIF) to 2.75 per cent of the gross monthly pay of workers. The contribution has been capped at Sh5,000.
