Kenyans planning early retirement and workers looking at growing their pension savings could be relieved if new proposals by the Treasury to remove taxes on some pension payments while increasing deductible contributions sail through.
Under the new proposals published by the Treasury on Friday, the government proposes to raise deductible pension contributions from Sh20,000 to Sh30,000 monthly.
“The Bill proposes to amend the Income Tax Act to increase the amount deductible in respect of contributions to registered pension or provident funds from taxable income of an individual and also contribution by the employer from Sh240,000 to Sh360,000 per year and Sh20,000 to Sh30,000 per month,” Treasury said in the tax laws amendment bill.
The increase of deductible pension contributions has the potential to raise savings by Kenyans, as more workers could consider increasing their contributions.
This is because this change will increase the non-taxable income of an individual in favour of pension contributions, earning Kenyans tax benefits of thousands of shillings.
The Treasury under the proposed amendments also wants to allow younger people –from 38 years— to access their pension tax-free provided they have been a member of the scheme for at least 20 years.
“The exemption from tax is intended to also apply to withdrawals from the funds prior to attaining retirement age due to ill health or after attaining 20 years from the date of registration as a member of the fund,” Treasury said.
For people who have retired under 65 years, their lump sum pension is taxed on a series of bands but the first Sh600,000 is tax exempt.
On the taxable sums, the first Sh400,000 is taxed at 10 per cent. The following Sh400,000 is taxed at 15 per cent and the next Sh400,000 is taxed at 20 per cent. This brings the total amount taxed at between 10 per cent and 20 per cent to Sh1.2 million.
Treasury first proposed changes to Kenya’s pension laws last year in the medium-term revenue strategy, where it laid down a plan to change the pension tax structure from exempt-exempt-tax to exempt with the aim of making pension withdrawals tax-free, irrespective of the beneficiary’s age.
The proposals in the tax amendment laws seek to bring back the reforms that stalled after the Finance Bill,2024 was shelved in June amid anti-tax protests.
The Bill had the same proposals touching on withdrawal of pension benefits and the amount of pension contributions that are deductible.
