Sunset years for those leaving public service bleak as amount of money yet to be remitted grows daily.
Savings of up to Sh30,000 per month in retirement benefit schemes will be exempted from tax if Parliament passes the proposal that seeks to raise the figure from the current Sh20,000.
The proposed 50 percent rise in the figure is contained in the Finance Bill 2024, which seeks to amend section 5 of the Income Tax Act that allows Kenya Revenue Authority to exempt from tax up to Sh240,000 annual income contributed as pension in retirement schemes.
The proposal to increase the figure to Sh360,000 per annum looks set to motivate people to save more for their retirement while lowering their tax liability. This will require passing in Parliament and endorsement by President William Ruto if it is to be effected.
The Bill is, however, silent on last year’s proposal by the Treasury, through the medium term revenue strategy to scrap tax on pension contributions accessed before 65 years.
Currently, only those aged above 65 years access pension without paying tax. Those above 50 but below 65 are given the first Sh600,000 for free, the next Sh1.6 million attracts between 10 percent and 25 percent tax while amounts above that are hit with 30 percent tax.
For those tapping into pension before turning 50, the first Sh600,000 is for free while Sh466,704 is taxed at between 10 percent and 25 percent, leaving the balance to be taxed at 30 percent.
The Treasury was proposing an exempt-exempt-exempt structure for pension. This would have meant that contributions towards pension, investment income generated from pension contributions and withdrawals by the contributors are all exempted from tax.
The current practice is exempt-exempt-tax where pension contributions and investment incomes are exempted from tax but withdrawals are subjected to a graduated tax structure depending on the age of the contributor.
The Treasury had faulted the current structure as discriminatory and one that forces people into tax planning, where they wait up to 65 years just for the sole purpose of escaping the tax that is tied to early withdrawals.
Pension and lump sum payments after the age of 65 are tax free. For those over 50 years of age but below 65 years and have been members of a scheme for more than 15 years, the first lump sum withdrawal of up to Sh600,000 is tax free while the rest is taxed at a graduated scale where the first Sh400,000 attracts 10 percent tax.
The next Sh400,000 for such a person is taxed at 15 percent, followed by 20 percent on the next Sh400,000. The next Sh400,000 is taxed at 25 percent while the balance is hit with a 30 percent tax.
If one is below 50 years of age and has been a member of a pension scheme for less than 15 years, the first lump sum withdrawal of up to Sh600,000 is tax-free while the first Sh121,968 is taxed at 10 percent, followed by 15 percent on the next Sh114,912.
A further Sh114,912 for such a person attracts 20 percent followed by 25 percent on another Sh114,912. The balance attracts 30 percent tax.
