KCA UNIVERSITY: SCHOOL OF PROFESSIONAL PROGRAMS

PFT SECTION 2:

EMPLOYMENT INCOME

5.1 Introduction

Employment income is one of the specified sources of income chargeable to tax. Employees are
charged to tax on all benefits received from employment (both cash and non cash) Employers are
required to operate a pay as you earn scheme where all benefits chargeable to tax are assessed on
monthly basis on all employees.

Monthly tax to be deducted

To arrive at monthly tax to be deducted:-

i. Determine the total of all benefits chargeable to tax

ii. Deduct allowable deduction to get the chargeable pay
iii. charge tax on chargeable monthly pay per monthly tax tables (see tax rates)
iv. Deduct from tax charged monthly personal reliefs.

5.2 Gains and Profits from Employment

Gains /profits from employment or services rendered will include both cash and non-cash
payments.

5.2.1 Cash Benefits

These include:
i. Wages, salary, leave pay, sick pay, payment in lieu of leave, directors' fees and other fees,
overtime, commission, bonus, gratuity or pension whether payable monthly or at longer or
shorter intervals.
ii. Cash allowances, e.g. house or rent allowance, telephone allowance, round sum allowance
etc.
iii. The amount of any private expenditure of the employee paid by the employer otherwise
than as a loan, e.g. house rent, grocery bills, electricity, water, telephone bills, school fees,
iv. Amount of subsistence, travelling, entertainment or other Allowance, however where the
Commissioner is satisfied that subsistence, travelling, entertainment or other allowance
represents solely the reimbursement to the recipient of an amount expended by him wholly
and exclusively in the production of his income from the employment or services rendered
then the calculation of the gains or profits of the recipient shall exclude that allowance or
expenditure;
v. Excess per diems. Cash allowances to employees working outside their work stations
popularly known as per diems in excess of Sh.2000 are taxable.
vi. Tax free remuneration. There are certain instances when an employer wishes to pay his
employees salaries negotiated net of tax. In such circumstances, the employer bears the

Page 1 of 15
 burden of tax on behalf of such employees. The tax so paid by the employer for the
employee becomes a benefit chargeable to tax
5.2.2 Non cash employment benefits
(i) benefits in kind
Where an employee enjoys a benefit, advantage or facility of whatsoever nature in connection
with employment or services rendered; the value of such benefit should be included in
employee’s earnings and charged to tax. The minimum taxable aggregate value of a benefit,
advantage or facility is Kshs. 3,000 per month or Kshs. 36,000 per annum.
(ii) ESOPs
In the case of an employee share ownership plan, the value of the benefit shall be the difference
between the market value per share and the offer price per share at the date the option is granted
by the employer. For clarification purposes, benefits arising from ESOPs not registered by the
Commissioner are taxable.
(iii)Car benefit – section 5 (2b)
Where an employee is provided with a motor vehicle by employer, the chargeable benefit for
private use shall be the higher of the rate determined by the Commissioner (based on the C.C
rating) and the prescribed rate of benefit. Where such vehicle is hired or leased from third party,
employees shall be deemed to have received a benefit in that year of income, equal to the cost of
hiring or leasing.
The “prescribed rate of benefit” is currently 2% per month of the initial cost of the motor vehicle

(iv) Provision of Servants

This include a house servant, a cook, watchman, gardener, an Ayah (maid), bodyguard,
messenger, chauffer etc. The values of such benefits are taxed at actual cost incurred by the
employer.

(v) Provision of Services

They include water, telephone (30% of cost) electricity, furniture (1 % cost pm), alarm system
etc. The CDT quantifies the value of such benefits to the employee through the quantified
benefits tables. Where the quantified benefit is different from the cost of providing the service to
the employer, whichever is the greater shall be the taxable value.

(vi) Housing benefit - section 5(3)

The housing benefit for ordinary employees and a whole time service director shall be the higher
of 15% of total income (or employment income, in case of whole time service director), the fair
market rental value and the actual rent paid by the employer.
Provided that;-
(i) If employer pays rent under an agreement not made at arm’s length with a third party, the
value of quarters shall be; the fair market rental value of the premises in that year or rent paid
by the employer; whichever is higher, or
(ii) Where the premises are owned by employer; the fair market rental value of the premises in
that year is to be taken.
Special case: Agricultural Employee
An agricultural Employee (Including a whole time service director) is one who is required by
terms of employment to reside on a plantation or farm;-

Page 2 of 15
His housing benefit shall be 10% of his gains or profits from employment minus any rent
charged to the employee. This is subject to employer obtaining prior approval from Domestic
Taxes Office
NOTES:
- In calculating the housing benefits employer is required to deduct rental charges recovered
from the employee or director. The amount remaining is the chargeable value to be included in
the total taxable pay.
- If the premises are occupied for part of the year only, the value is 15% of employment income
relative to the period of occupation less any rental charges paid by employee/director.
(Chargeable value shall be reduced by rent paid by an employee).
- Any employer who provides other than normal housing to an employee should consult his local
Domestic Taxes office for advice regarding the value of such housing.

5.3 Non-Taxable Benefits from Employment

i. passages to expatriate staff

When an employer himself pays for or reimburses the cost of tickets for passages, including
leave passages for his employee and family, the value of the passages is a non-taxable benefit of
the employee provided the employee is
i. recruited outside Kenya
ii. is in Kenya solely for the purpose of serving his employer and
iii. he is not a citizen.
iv. The passage is in the form of a ticket
Where, however, such employee receives a cash sum either periodically or in one amount which
he is free to save or spend as he chooses or for any other purposes and for the expenditure of
which he does not have to account to the employer, the amount received is a taxable cash
allowance.
ii. Medical services and medical insurance
Where an employer provides all its employees (including directors) with free medical services or
free medical insurance, the value of such medical service or insurance is not a taxable benefit on
the employee.
Please note that:
a. In the case of medical services provided to a director other than a whole time service director
shall be the limit which will be prescribed by the Minister from time to time. The current limit is
Kshs.1,000,000 per year.
b. The medical insurance must be provided by a provider who is approved by the Commissioner
of Insurance.

iii. Employers contributions to registered or unregistered pension scheme or

provident fund
Contributions made by employers on behalf of employees to retirements schemes is not taxable
on the employee. However, contributions paid by a non-taxable employer to unregistered
pension scheme or excess contributions paid to a registered pension scheme, provident fund or
individual retirement fund; shall be employment benefit chargeable to tax on the employee.

Other non taxable benefits

Page 3 of 15
 a) Employee staff meals
Free meals worth sh 4,000 and below offered to employees by the employer within his
premises are not taxable on the employees

b) Education benefit extended to low income employee working for educational institutions
provided the courses are pursued in the same institution
c) School fees:
Education fees of employee's dependants or relatives will not be taxed on the employees
provided the same has been taxed on the employers.

5.4 Allowable Deductions from Employment Income

(i) Defined benefit fund or defined contribution fund

An employee's contribution to any registered defined benefit fund or defined contribution fund is
now an admissible deduction in arriving at the employee's taxable pay of the month. The
employee's deductible contribution is the lesser of:
(a) 30% of pensionable pay.
(b) Employee’s actual contribution.
(c) Ksh.20,000 per month
This limit applies to persons contributing both to a registered scheme and the NSSF
(ii) Home ownership savings plan
A depositor (employee) shall in any year of income be eligible to a deduction up to a maximum
of Kshs. 8,000 /- (Four thousand shillings) per month or Kshs. 96,000/- per annum in respect of
funds deposited in “approved Institution” under "Registered Home Ownership Savings Plan", in
the qualifying year and the subsequent nine years of income.
Further, with effect from 1st January 2007 interest earned on deposits not exceeding Kshs. 3
million which deposits are made in qualifying institutions shall be exempt from tax provided
that:-
- Employer has evidence to confirm that the Home Ownership Savings Plan with which
employee wants to save is registered by the Commissioner of Domestic Taxes.
- Employer will be the one to deduct and remit the amount to the Institution on behalf of the
employee.
- Employers will attach to Form P9A (HOSP) a declaration duly signed by the eligible employee.
The declaration so signed will serve as verification and confirmation by the
employer that the employee does not directly or indirectly own interest in a permanent house.
NOTE:
“Approved Institution" - Means a Bank or financial institution registered under the Banking Act,
an Insurance Company licensed under the Insurance Act or a Building Society registered under
the Building Societies Act".
(iii) owner occupied interest (mortgage interest relief) - section 15(3)(b)
In ascertaining the total income of a person for a year of income interest paid on amount
borrowed from specified financial institution shall be deductible. The amount must have been
borrowed to finance either:-
(i) the purchase of premises or
(ii) improvement of premises - which he occupies for residential purposes.
The amount of interest allowable under the law must not exceed Kshs.300,000 per year
(equivalent to Kshs. 25,000 per month).

Page 4 of 15
If any person occupies any premises for residential purposes for part of a year of income the
allowable deduction shall be limited to the period of occupation.
The financial institutions specified under the fourth schedule of the Income Tax Act include:-
- A bank or a financial institution licensed under the Banking Act.
- An insurance company licensed under the Insurance Companies Act.
- A building society registered under the Building Societies Act.

CHAPTER SIX
RELIEFS
6.1 Personal reliefs
A resident individual with taxable income is entitled to a personal relief of Kshs. 1,162 per
month (i.e. Kshs. 16,896per annum for 2019) and sh 28,800 p.a for 2020. This is a uniform relief
and employers are advised to automatically grant personal relief to all employees irrespective of
their marital status.
Individuals serving several employers qualify for personal relief from only one employer (i.e.,
main employment).
6.2 Insurance Relief
A resident individual shall be entitled to insurance relief at the rate of 15% of premiums paid
subject to maximum relief amount of Kshs. 5,000 per month (or Kshs. 60,000 per annum) if he
proves that;-
- he has paid premium for an insurance made by him on his life, or the life of his wife or of his
child and that the Insurance secures a capital sum, payable in Kenya and in the lawful currency
of Kenya; or
- his employer paid premium for that insurance on the life and for the benefit of the employee
which has been charged to tax on that employee; or
- both employee and employer have paid premiums for the insurance:
Provided that;-
- no relief shall be granted in respect of part of premium for an insurance which secures a
benefit which may be withdrawn at any time at the option of the insured.
- premiums paid for an education policy with a maturity period of at least 10 years shall
qualify for relief.
- only premiums paid in respect of an insurance policy taken on or after 1st January,2003
shall qualify for relief.
CHAPTER SEVEN
WITHHOLDING TAXES

Objectives
By the end of the topic the student should be able to:-

 Compute tax liability using tax rates

 Define withholding tax, set off
 Identify which relief is applicable
7.1 Introduction
This is a method of collecting taxes at source which was introduced to make payment of taxes
convenient both to the tax payer and to the government. It also reduces the collection costs and
minimizes chances of tax evasion.

Page 5 of 15
 A person who makes a payment of, or on account of, any income which is subject to
withholding tax shall deduct tax there from as per the specified rate and
i. Remit the tax deducted to the DTD by the 20th day of the following month and for PAYE
by the 9th day of the following month.
ii. Pay the payee net of withholding tax
iii. Furnish the payee with a certificate showing the gross amount paid, the total tax deducted
and such other particulars as the Commissioner may require.
iv. Keep a record in respect of, name of payee, Personal Identification Number (PIN), gross
amount paid, nature of payment and amount of tax deducted.
At the end of the year the person will be assessed on the gross income but a credit will be given as a set-off for all
taxes paid in advance, except in those cases where WHT is a final tax. A set-off tax must be made in the same year
in which the deduction took place.

Highlight two advantages and two disadvantages of taxation at source method to both the
revenue authority and the taxpayer.

Suggested solution
Revenue authority: Tax payers

Advantages
i. Minimizes changes of tax evasion
ii. Administratively cheaper. The agents are
fewer than the tax payers and they bear
the cost.
Disadvantages
i. Risk of dishonest agents overtaxing
people and failing to remit the tax.
ii. Cost of monitoring compliance and
educating agents.
Advantages
i. Risk of non compliance transfer to the
agent : No penalties, interest etc.
ii. Convenient since tax is collected before
receipt of income and the procedures are
observed by the agent.
Disadvantages
i. Taxes are deducted before theirdue dates.
There’s an opportunity cost to this eg loss of
working capital .
ii. In some cases does not lead to civic
conscious, no– pinch.

7.2 Withholding tax rates

Resident Notes Non-

payee resident
payee
Management, professional and training fees 5% (1) 20%*
Royalties 5% 20%*
Leasing equipment Nil (2) 15%
Dividend<12.5% voting power 5%* (3) 5%/10%*
>12.5% voting power Exempt 10%

Page 6 of 15
 Interest from financial institutions and gov’t 2-year bearer 15% (4) 15%*
bonds (1)
Interest on bearer bonds with maturity of 10 years and above 10% 15%
Interest on bearer certificates(1) 25%* (5) 25%*
Housing bond interest(1) 10%* (4&5) 15%*
Rents-immovable property N/A 30%*
Pension and taxable withdrawals from pension/provident 10%- (6) 5%*
funds 30%*
Insurance commissions 10% (7) 20%*
Contractual fees 3% (8) 20%
Consultancy and agency fees 5% (8) 20%*
Consultancy fee to ea community countries N/A 15%
Surplus pension fund withdrawals 30% 30%
Shipping business N/A (9) 2.5%
5%
Transmission of messages by cable, radio etc

Lottery/ betting winnings 20% (10)

* means that the withholding tax is final

1) Agency fees on export of flowers, fruits and vegetables are exempted. From January
2006, audit fee for analysis of maximum residue limits paid to a non-resident
laboratory or auditor are exempted.
2) Aircraft leasing exempted. Note: no withholding tax on aircraft leasing from
residents with effect from 15 June 2007.
3) 5% applicable to East African citizens from 15 June 2007.
4) This applies only to individuals. The non-resident rate is 15%. The resident rate is as
shown but is not a final tax for corporations.
5) Limited to income of sh. 300,000 p.a.
6) This rates apply only on the graduated PAYE tax rates (for early withdrawal) or in
bands of sh. 400,000 (for withdrawals after a 15 year period or at 50 years of age)
7) 5% is paid to a resident broker.
8) If fees are in excess of sh. 24,000 per month when paid to a resident person.
9) For taxable shipping business.
10) Effective 1st January 2012

Note: Lower rate may apply there is a tax treaty in force. The countries with which Kenya has
signed double tax treaties with are UK, German, Canada, Denmark, Norway, Sweden, Zambia,
and India. Treaties have been negotiated or are being negotiated with France, Uganda and
Tanzania but are not in force.

7.3 Pay as you earn (PAYE)

Page 7 of 15
The "Pay As You Earn" method of deducting income tax from salaries and wages applies to all
income from any office or employment. Thus "Pay As You Earn" applies to weekly wages,
monthly salaries, annual salaries, bonuses, commissions, directors' fees (whether the director is
resident or non-resident) pensions paid to pensioners who reside in Kenya, where the amount
from a registered pensions funds exceeds Kshs.300,000 per annum, and any other income from
an office or employment. The system applies to all cash emoluments and all credits in respect of
emoluments to employees' accounts with their employers, no matter to what period they relate.

It does not include earnings from "casual employment" which means any engagement with any
one employer which is made for a period of less than one month, the emoluments of which are
calculated by reference to the period of the engagement or shorter intervals.

It is the employer's statutory duty to deduct income tax from the pay of his employees whether or
not he has been specifically told to do so by the Department. The normal P.A.Y.E. year runs
from 1st January to 31st December. The necessary P.A.Y.E. Stationery is issued to Employers
before commencement of the year.

Who is liable for P.A.Y.E.

Any individual whose gross pay plus benefits including housing provided by employer exceeds
Kshs 24,000 in 2020- per month is liable to PAYE. However, if employer is aware that the
employee has income from main employment elsewhere, then PAYE should be deducted even
though the earnings are less than Shs.11135/- per month.

Employees leaving in the course of the year

When an employee is leaving employment, his employer must complete the employee's Tax
Deduction Card, up to the date of leaving and including the final payment of remuneration.
The Tax Deduction Card should be retained by the employer until the end of the year. Any late
payment of emoluments, e.g. arrears of pay, bonus, commission made in a month after the
employee has left employer should be taxed without any monthly personal relief.
New employee
For a new employee whose emoluments exceed the amounts stated in Paragraph 3 of Part II, the
employer should grant personal relief effective from the month of commencement of
employment.

REMITTANCE OF TAX
The Law requires an employer to pay-in the P.A.Y.E. tax deducted from his employees' pay on
or before the 9th day of the month following pay-roll month. Failure and/or late P.A.Y.E
payments will incur penalty at the rate of 20 per cent of amount paid late and interest at 2% per
month.

If an employer finds that he is unable to make his monthly payments by the due date - i.e. before
the tenth day of the month following the month of deduction - for reasons of remoteness or
distance from a bank, he should make full representations setting out all the relevant facts to the
appropriate Domestic Taxes Office.

Page 8 of 15
Employers are required to make payments of tax recovered from Lump Sum amounts, tax
established through P.A.Y.E. Audits, penalty or interest imposed for P.A.Y.E. offences in the
usual way as normal monthly P.A.Y.E. remittances.

PAYE RETURNS
Employers are now required to submit quarterly Pay as you earn returns before the 9 th of the
month following the end of each quarter, in respect of emoluments earned in each of the three
months including the tax deducted.
Quarterly and Annual PAYE returns
Employers are not required to submit quarterly returns if they file monthly PAYE returns
online. The requirement to submit Annual PAYE returns has been scrapped.
PAYE PAYMENT
This relates to payment of PAYE on emoluments paid to directors of a company. This rule
requires employers to deduct and remit PAYE on emoluments. The due date for tax on any
emolument to a director would be the 9th of the following month or the fourth month of the
accounting date.

PAYE Offences - Section 37 (2)

The Commissioner may impose a penalty under Section 37 (2) of the Income Tax Act if an
employer fails;-
i) to deduct tax upon payment of emoluments to an employee
ii) to account for tax deducted
iii) to supply the Commissioner with a certificate prescribed under PAYE Rules.
The penalty is at the rate of 25% of the amount of tax involved or Kshs. 10,000, whichever is
greater.

PAYE AUDIT PROCEDURE

The Domestic Taxes Department may send officers to employers’ paying points during the year
to check that they are operating the scheme correctly and to give guidance to employers if they
are in difficulties.
Any such officer will produce a signed authority. Employers will be expected to make all records
relating to P.A.Y.E. operation available for inspection.
The audit process will include inter alia, a check that:
a) The employer has brought into the payroll all the employee's emoluments, cash allowances
and benefits.
b) The employer has deducted correct amount of P.A.Y.E. tax.
c) The tax deducted has all been paid over to the bank.
d) The pay shown in employer's salary records has correctly been transferred to the Tax
Deduction Cards.
e) The Tax Deduction Card has been correctly completed.
Exam focus
Highlight four objectives of Pay As You Earn (PAYE) audits conducted by the revenue
authority of your country (4 marks) (May 2006 Question One-b)

Page 9 of 15
CIRCUMTANCES THAT MAY TRIGGER PAYE AUDIT
 Non-remittances of PAYE tax which has been deducted (arrears cases)
 Fluctuating and late payment of PAYE
 Irregularities detected through examination of PAYE end of year returns
 Employers whose final accounts submitted to DTD are suspect
 Salaries, wages and other staff related expenses claimed in the accounts being higher than
in comparison with the PAYE remittances made as per employer records.
 Directors’ fees bonuses claimed in accounts not corresponding with PAYE as you earn
remittances.
 Third party information about employer flouting PAYE rules (especially former
employees)
 Information from taxpayer recruitment unit program.
 Risk criteria or random selection generally based on the officers’ best information.

2. MULTIPLE P.A.Y.E. SOURCES OF INCOME

There are employees who have two or more sources of income which fall within P.A.Y.E.
provisions, e.g. a person with several directorships or a person with several part-time
employments not falling within the definition "casual employment" .
Such employees should be granted monthly personal relief by the employer at their main source
of employment income. Other employers should compute tax at a flat rate of 30%
3. IRREGULARLY PAID EMPLOYEES
P.A.Y.E. tax basically is deductible from all payments made in any month. Thus if employees
are paid weekly, fortnightly or at any other interval, the entry of pay on the Tax Deduction Card
for the month will be the total of payments in the month and will be made on the occasion of the
last payment. Tax due on the whole of the monthly pay will be deducted from the last payment.
Where exceptionally the last payment of salary, etc., to an employee in the month is less than the
whole of the tax for the month, the employer will recover the balance of tax from the next
payment of salary, etc. to the employee.

4. TAX FREE REMUNERATION

There are certain instances when an employer wishes to pay his employees salaries negotiated
net of tax. In such circumstances, the employer bears the burden of tax on behalf of such
employees. The tax so paid by the employer for the employee becomes a benefit chargeable to
tax

CHAPTER EIGHT
INCOMES FROM PAST EMPLOYMENT

8.1 Withdrawals from registered pension schemes

Where an employee receives his pension benefit in form of annuities; the first Ksh 300, 000 p.a.
(Ksh. 25, 000 p.m) is exempted from taxation. This has been increased from Ksh. 180,000 W.e.f
1 January 2010 Any amounts in excess of this limit shall be subject to tax with the other
incomes at the individual scale rate of tax. This will benefit resident retirees who are below the
age of of 65 years, as those at 65 years and above are exempted from tax on their monthly
pensions.

Page 10 of 15
Any pension annuities paid from unregistered funds will NOT be taxed.

8.2 Lump sum payments out of and withdrawals from registered pension and provident
funds
For lump sum received in commutation of a registered pension fund, the exempt amount shall be
the lower of:
 Ksh.600,000; or
 Ksh. 60,000 x no. of years of service in that employment if less than ten years.
Any amounts in excess of the above limits shall be taxed with other incomes.
Lump sum payments and withdrawals from unregistered pension funds are NOT taxable.

The tax-free limit on commuted lump sums has been increased from sh. 480 000 to sh.600 000
while the limit on withdrawals has been increased from sh. 48 000 to sh. 60 000 per annum
subject to a limit of sh. 600 000. This also covers benefits paid by NSSF which is limited to sh.
600 000.
Withdrawals made in lump sum by retirees above the age of Fifty or retirees who have
contributed to the scheme for more than fifteen years are taxed in bands of Ksh. 400,000. For
early retirees the pension is taxed at the normal graduated scale (see WHT rates)

8.3 Taxation of Bonuses/ Gratuity 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)(ii) 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.

8.4 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.
Methods of Spreading Compensation
Method I
Where the contract is for a specified term, amount received as compensation on termination of
contract shall be deemed to have accrued evenly and assessed over the unexpired period.
Example:

Page 11 of 15
A contract for five years was terminated on 31/12/2012 after it had run for 3 years.
Compensation of Kshs.1,100,000 is paid. The amount will be spread evenly and assessed in the
remaining period of 2 years as follows:-
Year Taxable Amount
(Kshs.)
2013 550,000
2014 550,000
Method II
Where the contract is for an unspecified term and provides for terminal payment, the amount
paid as compensation is to be spread forward and assessed at the rate equal to employee’s
remuneration per annum received from the contract immediately before termination.
Example:
A contract for an unspecified term provides for payment of Kshs. 700,000 as compensation in
the event of termination. It is terminated on 31/12/2012 and the employee's rate of earning was
Kshs. 300,000 per annum. The compensation is spread forward as follows
Year Taxable Amount
(Kshs.)
2013 300,000
2014 300,000
2015 100,000
700,000
.
Method II
Where the contract is for unspecified term and does not provide for compensation, amount
received as compensation shall be deemed to have accrued evenly over three years period
immediately following termination of contract.
Example:
A contract is for an unspecified term with no provision for payment of compensation. The
contract is terminated on 31/12/2012 and Kshs. 1,500,000 compensation is paid, the amount is to
be spread forward and assessed evenly in three years as follows:-
Year Taxable Amount
(Kshs.)
2013 500,000
2014 500,000
2015 500,000
1,500,000
NOTES:
- The methods outlined above apply to all employees including whole time service directors.
- If an Ex-gratia is paid it would be assessable in the year of receipt.
- Use the current rates of tax until subsequent years rates are enacted.
- Personal Relief should not be granted in advance before commencement of any year of income.

CHAPTER NINE

Page 12 of 15
 INVESTMENT INCOMES

OBJECTIVES
By the end of the topic the student should be able to:

 Define dividends, and interest

 State what constitutes dividend, and interest
 Calculate dividend, and interest income
 Explain the tax rules governing dividend, and interest

Investment income is one of the specified sources of incomes. Investment income is received in form of dividends or
interest
9.1 Dividend income
"Dividend" means any distribution (whether in cash or property, and whether made before or
during a winding up) by a company to its shareholders with respect to their equity interest in the
company, other than distributions made in complete liquidation of the company of capital which
was originally paid directly into the company in connection with the issuance of equity interests;

9.1.1Deemed Dividends

a) In a voluntary winding up of a company, such amounts distributed as profits including any

profits realized on the disposal of fixed assets of a company, whether before or during the
winding up and whether paid in cash or otherwise.
b) The issue of debentures or redeemable preference shares or ordinary shares for free. The
dividend amount shall be taken to be the greater of nominal or redeemable value and the
market value.
c) The issue of debentures or redeemable preference shares or ordinary shares at a discount
provided the discount factor exceeds 5% of the nominal/par value. In this case the discount
amount shall be taken as the dividend and taxed accordingly.
9.1.2 Exempt Dividends

a) Dividends received by a company that owns or controls 12.5% or more of the voting powers
of the paying company.
b) Dividends received from outside Kenya or from non-resident companies.
c) Dividends received by a resident insurance company from its investment income of the life
insurance fund.
d) Dividends amount being the discount factor on the issue of debentures or redeemable
preference shares or ordinary shares provided the discount factor is less than 5% of the par
value.
9.1.3 Qualifying Dividends

Qualifying dividends are dividends paid by limited companies and SACCOS. Thaey are subject
to withholding tax at 5% which is final. This is a tax incentive meant to encourage growth in
capital markets by taxing dividends at a low rate.

9.1.4 Non-Qualifying Dividends

Page 13 of 15
These are dividends paid by designated co-operative societies other than SACCOS. The
withholding tax rate is 15% which is not final

9.2 Interest income

Interest means;
 Amount payable in any manner in respect of a loan, deposit, debt, claim or other right or
obligation,
 Premium or discount by way of interest
 Commitment or service fee paid in respect of any loan or credit;
 Discount received upon final redemption of a bond
9.2.1 Exempt interest
i. Interest on tax reserve certificates which may be issued by authority of the Government.
ii. Interest on a savings account held with the Kenya Post Office Savings Bank.
iii. Interest earned on contributions paid into the Deposit Protection Fund established under
the Banking Act.
iv. Interest paid on loans granted by the Local Government Loans Authority established by
section 3 of the Local Government Loans Act.
v. Interest income accruing from all listed bonds, notes or other similar securities used to
raise funds for infrastructure and other social services, provided that such bonds, notes or
securities shall have a maturity of at least three years.
vi. Interest income generated from cash flows passed to the investor in the form of asset-
backed securities.
vii. Interest earned on deposits not exceeding Kshs. 3 million which deposits are made in
qualifying institution in registered home ownership savings plan (plan)

All other interest income is subject to withholding tax (refer to WHT rate).
9.2.2 Qualifying interest
This is the aggregate interest, discount or original issue discount receivable by a resident
individual in any year of income from –
(i) a bank or financial institution licensed under the Banking Act, or
(ii) a Building Society registered under the Building Societies Act which in the case of
housing bonds has been approved by the Minister for the purposes of this Act, or
(iii) the Central Bank of Kenya:
Qualifying interest is subject to final withholding tax
9.2.3 Non qualifying interest
This is interest received by a body corporate or non- resident individual or a resident individual
from sources other than those specified above. Withholding tax on non qualifying interest is not
final

CHAPTER TEN
INCOMES FROM USE OF PROPERTY
10.1 Royalty income:
This is income earned by a person for rights granted to others to use his intellectual properties.
These properties include:

Page 14 of 15
 a) Copyright, Literally, artistic or scientific works.
ii) Cinematograph including film or tape used in radio or any other form of broadcasting.
iii) Patents, trademarks, designs, model, plan or formula.
iv) Any industrial, commercial or scientific equipment or information concerning industrial
commercial or scientific equipment.
Expenses will be allowed as long as they were incurred wholly and exclusively in earning such
income.
Note:
i. For non-residents the income is taxed at 20% with-holding tax which is a final tax. No
expenses are allowed.
ii. For residents, a 5% withholding tax is first deducted before determining net royalty income.
It is then deducted from gross tax liability of the resident individual as a tax credit.

10.2 Rent income

This is income earned by a person for rights granted to others to occupy his property. In
determining the taxable rent income, all expenses incurred wholly and exclusively in earning
such income are allowed (deducted) against such income. These expenses include the
following:
i. Bad debts and rental losses.
ii. Advertising and promotional costs of revenue nature.
iii. Legal costs and stamp duty on acquiring a lease of less than 99 years.
iv. Water and rates
v. Management and Agency fees.
vi. Insurance
vii. Staff wages and salaries.
viii. Repairs and maintenance
ix. Structural alterations on the building necessary to maintain existing rent.
x. Heating and lighting.
xi. Capital allowances as per the second schedule

Note
1) Any cost incurred with the intention to increase rent will be disallowed.
2) Any cost in respect of extension or replacement of the building or part thereof is not
allowable.
3) All costs of a capital nature are not allowed.
4) For non-residents the income is taxed at a rate of 30% with-holding tax which is a final
tax. No expenses are allowed.

Page 15 of 15