The net pay for salaried workers has shrunk by up to six percent as payroll accountants start affecting new tax bands on incomes.
Employees should expect smaller payslips from this week when companies pay their January salaries in comparison to what they were earning in December last year.
During the revision of taxes in December, Parliament introduced last-minute changes to the tax laws that reduced the number of tax bands to just three and slapped the maximum 30 per cent tax rate to any amounts above Sh32,333, down from Sh57,334.
To soften the blow, the government has retained 100 percent tax relief for workers earning less than Sh24,000, which has helped cushion the low-income earners.
The tax relief is not permanent and, while it is not clear when, it may be taken away by the National Treasury anytime.
But the net effect of the changes will be to see high earners shoulder the biggest burden of keeping the government afloat, and has seen payroll taxes increase by about six percent for corporates.
Kenya uses the graduated scale to calculate tax on salaries, with the rate increasing with the pay.
Now, it will just be 10 per cent for the first Sh24,000, then 25 percent for the next Sh8,333 and thereafter any remaining amounts above Sh32,334 will now be taxed at the maximum 30 percent.
Before Covid-19 tax reliefs were unveiled, the five tax bands helped stagger Pay as You Earn (PAYE) to soften the blow before the highest tax rates kicked in.
Treasury Cabinet Secretary Ukur Yatani says changing the tax bands will not increase taxes beyond what was being charged before Covid-19 tax reliefs were introduced.
But by reducing the tax bands, the only thing standing between the high taxes for low earners is the tax relief.
For instance, an employee who earns Sh25,000 will continue earning net of Sh24,750, due to enhanced personal reliefs.
But above that, the amounts will start being affected by the reversal of the Covid-19 reliefs.
One earning Sh50, 000 a month will take home Sh42,617, a small reduction from the Sh45,633 in December.
Those earning Sh100,000 will take home Sh77,617 compared to Sh82,200 in December.
Employees earning Sh200,000 will have the taxman take away about Sh52,000 in taxes and will be left with Sh147,617 in net salary. In December, their net was Sh152,200.
For those earning Sh500,000, the taxman will take away about Sh142,000 to leave them with Sh357,617 in net pay. This is down from Sh362,200 in December.
The silver lining in the taxes is the relief on the first Sh24,000 which will leave most earners with a measly Sh273 more than what they were earning before Covid relief.
However, if one is on a pay cut, then this relief will do very little to compensate for the higher taxes.
“We reduced the categories from five to three and there is no one who is going to pay more than what they were paying before Covid-19. Our simulations show that under the new tax rates, all categories will be paying less by at least Sh3,000,” Mr Yatani said.
The latest data from the Kenya National Bureau of Statistics (KNBS) shows nearly half of the 2.92 million workers in the formal sector took home slightly above Sh30,000 last year.
The data shows that 74.58 percent of formal sector workers earn below Sh50,000, and this explains why the government chose to lower the tax band from 74,000 to milk this group.
The KNBS data shows by the third quarter of 2020, Kenya had an adult working population of 19 million. From this, 17.6 million are employed.
If the government succeeds in bringing most of these people into the maximum tax rate, then income tax will emerge as the biggest cash cow for the government as it struggles to raise taxes to plug its revenue shortfalls at a time when it is nearing its borrowing limits.
The changes come at a time when the Treasury has also revised the Value Added Tax (VAT) from 14 to back 16 percent and the corporation tax from 25 percent to 30 percent.
