EMPLOYMENT INCOME

Source of Income
Income is derived from sources in Uganda to the extent to which it is – derived by a resident
person in carrying on a business except to the extent that it is attributable to a business carried on
by the person through a branch outside Uganda; employment income or a fee for the provision
of services –
(i) derived from employment or services exercised or rendered in Uganda;
(ii) paid by a resident person, other than as an expenditure of a business carried on by a person
outside Uganda through a branch; or
(iii) paid by non-resident person as an expenditure of a business carried on by a person through a
branch in Uganda

For the purposes of subsection (1) –

(a) the gross income of a resident person includes income derived from all geographical sources;
and
(b) the gross income of a non-resident person includes only income derived from sources in
Uganda.
Subject to this Section, employment income means any income derived by an employee from
any employment and includes the following amounts, whether of a revenue or capital nature –

Capital means material wealth in the form of money or property which can be used to produce
further wealth or income. “Revenue is the gross inflow of economic benefits during the period
arising in the course of the ordinary activities of an enterprise when those inflows result in
increases in equity, other than increases relating to contributions from equity participants”.
Capital expenditure includes costs incurred on the acquisition of a fixed asset, purchase related
expenditure and installation cost which increases the earning capacity of an existing fixed asset.
The capital expenditure opposes to revenue expenditure. Normally, revenue expenditures are
incurred for receiving or earning of income

Capital receipts Vs Revenue receipts

• Nonrecurring in nature • Recurring in nature

• Sale of fixed capital (e.g., sale of fixed property) or sale of capital (e.g., an issuance of share). •
Sale of circulating capital (e.g., trading stock) or rendering the service.

• Receipts of substitution of a source of income (e.g., compensation against termination of job). •

Receipts of substitution of an income (e.g., a prize to an employee for his good service).

• Receipts against surrender of certain rights under an agreement (e.g., own right handed over to
others). • An agreement for the loss of future profits (e.g., if sum received from the breach of the
agreement).

• Sales proceeds of used or unused assets of business or investment. • Sales proceeds of trading
stocks or rendering service.
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• Mostly in a lump sum, but may be in instalment (e.g., fixed assets if sold in instalment) basis. •
May be in lump sum (e.g., a person can receive a mining royalty in a lump sum).

• The devaluation/evaluation of currency of capital account or investment. • The

devaluation/evaluation of currency during the course of business.

• Grant or subsidies if received from the government for a particular purpose (e.g., for a
development purpose). • Grant or subsidies received in order to maintain the foreign
competition or assisting the business.

• A compensation received from insurance against the capital. • A compensation received from
insurance against the trading stock.

• Not directly credited in profit & loss account. • Directly credited in profit & loss account.

Subject to subsection (6a),16 where the gross income of a taxpayer for a year of income consists
exclusively of employment income derived from a single employer from which tax has been
withheld as required under Section 116, the income tax payable by the taxpayer for the year of
income is the amount equal to the sum of the amounts required to be withheld from such income
under
Section 116.

Employer means:

A person (individual or corporate) who employs/remunerates an employee

Employee means:

An individual engaged in an employment.

Employment is regarded to exist where there is a contractual relationship of master and servant
for pay. Employment connotes an office or occupation thereof.

In the words of Rowlatt J in the case of Great Western Rail Company Vs. Bater (1920) 3 KB
266, the office or employment must be „ a subsisting, permanent, substantive position, which
had an existence independent of the person who filled it and which went on and was filled in
succession by successive holders. A contract of service which creates the relationship of a
master and servant should always be distinguished from a contract for service which is an
incident in the carrying on of a vocation or profession. Remuneration arising from a contract of
service is taxable under the employment tax scheme, while earnings from a contract for service
are taxable under a business income regime.

Employment for tax purposes seeks to mean:

i) Position of an individual in employment of another.

ii) Directorship of a Company

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iii) A position entitling an individual to remuneration on permanent/ contractual
temporary/part-time.
iv) Holding/ Acting in a Public Office
Under (i) above, the position of an individual in the employment of another is intended to refer to
the ordinary meaning of employment and therefore existing judicial authorities on whether there
is an employment relationship continue to be relevant.

An employment relationship does not exist where the individual is engaged on his or her own
account as an independent contractor. The distinction between an employee and an independent
contractor will therefore necessitate looking at a number of factors such as whether the hirer has
legal right to control the manner in which the work is performed and the degree of integration of
the activities of the hired person in the hirer‟s business.

This will involve considering whether;

a) The person hired is engaged on a continuous basis
b) The services are performed at the hirer‟s place of business
c) The hirer controls the timing and scheduling of work
d) The hirer provides the working tools, plant and other relevant facilities for the hired
person to perform his work.

ie when distinguishing between employees and contractors, one should ask

• Who has control over hours of work?
• Who has control over location of place of work?
• Who has control over sequence of work?
• Who furnishes the tools, equipment and materials?
• Whether the work has a risk of profit or loss?

Under (ii) above, the director is an employee under the employment of the company to which he
is a director. This implies that the director falls within the armbit of PAYE just like other
employees. This further clarifies the taxation treatment of directors who are at the same time
shareholders especially for small companies where ownership and management may not be
separate and where the director thinks he is the employer.

Under (iii), the holder of a position entitling him to a fixed or ascertainable remuneration is
deemed an employee to avoid „employees‟ disguised as independent contractors to avoid
PAYE.

Under (iv), the holding of or acting in a public office is in addition to covering public
officers/servants, meant to include non-traditional civil servants especially politicians.

Employment income is income accruing to an employee as a result of services rendered in

respect of the employment. The income is considered earned at the time the emoluments are
paid or when the employee becomes entitled to the payment whichever is the earlier.
Emoluments can be in cash or non-cash (in kind).

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(s.80) Foreign Employment Income207
(1) Foreign-source employment income derived by a resident individual is exempt from tax if the
individual has paid foreign income tax in respect of the income.
(2) A resident individual is treated as having paid foreign income tax on foreign source of
employment income if tax has been withheld and paid to the revenue authority of the foreign
country by the employer of the individual.

COMPOSITION OF EMPLOYMENT INCOME

Employment income comprises of the following amounts according to the section 19(1):-

a) Wages, salary, leave pay, payment in lieu of leave, overtime pay, fees, commission,
gratuity, bonus, allowance (entertainment, duty, utility, welfare, housing, medical, any
other)
b) The value of any benefits in kind provided by/on behalf of the employer.
c) Amount of private/personal expenditure discharged or reimbursed by the employer.
d) Employment terminal and retirement benefits.
e) Insurance premiums paid by the employer for the employee and/or his dependants.
f) Payments in respect of change of employment/contract terms.
g) Discounts in shares allotted to an employee and profit/gain on disposal of such shares.
h) The amount of any gain derived by an employee on disposal of a right or option to
acquire shares under an employee share acquisition scheme.
It should be noted that all, or any of the above in combination comprise of employment income.

Benefits in kind
A benefit in kind is the facilitation not by way of cash by an employer of an employee as
part of past, present or future employment terms. Such benefits need not have been in the
written employment term.

Cases when a benefit is said to have been obtained in respect of employment:

 When it is provided by an employer or by a third party under arrangement with the

employer or an associate of an employee.
 When it is provided to an employee or an associate of an employee
 When it is provided in respect of past, present or prospective employment.

Taxable Non cash Employment benefits include:-

a) Private use of official motor vehicle

b) Provision of Domestic Servants, Utilities.
c) Meals, Refreshment, Entertainment
d) Relief of Debt Obligations/Interest.
e) Provision of loans at a rate below the statutory rate

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f) Provision of property by employer to employee (at non arm‟s length terms).
g) Provision of Residential Accommodation.
h) Any other benefits as determined by the commissioner.

Note; computation of the employee‟s chargeable income will mainly involve addition of the
various incomes received (i.e. both in monetary and in kind) out the employment relationship.
In the case of employment income, a few items are deductable given that there are not many
expenses recognized as being incurred in the process of earning this kind of income. Some of
the items that are deductable in order to determine chargeable income include; local service tax.

VALUATION/MONETIZATION OF EMPLOYMENT BENEFITS:

FIFTH SCHEDULE S.19 (3) ITA 1997

This arises where employees are rewarded in kind

The valuation of benefits for the purposes of Section 19(3) of this Act shall be determined in
accordance with this schedule.

2. For the purposes of this Schedule, a benefit provided by an employer to an employee means a
benefit that –
(a) Is provided by an employer, or by a third party under an arrangement with the employer or an
associate of the employer;
(b) Is provided to an employee or to an associate of an employee; and
(c) Is provided in respect of past, present or prospective employment.

3. Where a benefit provided by an employer to an employee consists of the use, or availability

for use, of a motor vehicle wholly or partly for the private purposes of the employee, the value
of the benefit is calculated according to the following formula –
(20% x A x B/C) – D
Where –
A is the market value of the motor vehicle at the time when it was first provided for the
private use of the employee;
B is the number of days in the year of income during which the motor vehicle was used
or available for use for private purposes by the employee for all or a part of the day;
C is the number of days in the year of income; and
D is any payment made by the employee for the benefit.

4. Where a benefit provided by an employer to an employee consists of the provision of a

housekeeper, chauffeur, gardener or other domestic assistant, the value of the benefit is the total

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employment income paid to the domestic assistant in respect of services rendered to the
employee, reduced by any payment made by the employee for the benefit.

5. Where a benefit provided by an employer to an employee consists of the provision of any

meal, refreshment or entertainment, the value of the benefit is the cost to the employer of
providing the meal, refreshment or entertainment, reduced by any consideration paid by the
employee for the meal, refreshment or entertainment.

6. Where a benefit provided by an employer to an employee consists of the provision of utilities

in respect of the employee‟s place of residence, the value of the benefit is the cost to the
employer of providing the utilities reduced by any consideration paid by the employee for the
utilities.

7. Where a benefit provided by an employer to an employee consists of a loan or loans in total

exceeding one million shillings at a rate of interest below the statutory rate, the value of the
benefit is the difference between the interest paid during the year of income, if any, and the
interest which would have been paid if the loan had been made at the statutory rate for the year
of income.

8. Where a benefit provided by an employer to an employee consists of a waiver by an employer

of an obligation of the employee to pay or repay an amount owing to the employer or to any
other person, the value of the benefit is the amount waived.

9. Where a benefit provided by an employer to an employee consists of the transfer or use of

property or the provision of services, the value of the benefit is the market value of the property
or services at the time the benefit is provided, reduced by any payment made by the employee
for the benefit.

10.Where a benefit provided by an employer to an employee consists of the provision of

accommodation or housing, other than where Section 19(1)(a) or (c) applies, the value of the
benefit is the lesser of –
a) The market rent of the accommodation or housing reduced by any payment made by the
employee for the benefit; or
(b) 15% of the employment income, including the amount referred to in paragraph (a), paid by
the employer to the employee for the year of income in which the accommodation or housing
was provided.

Example: A company pays a basic salary sh. 3,000,000 per month; transport allowance sh.
300,000 per month and medical allowance sh. 200,000 per month. They provide a company
house whose market rent is Ugx. 600,000 per month for which the employee contributes
50,000 per month. The benefit derived by the employee is the lesser of:

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 (a) (600,000 – 50,000) = 550,000 and
(b) 15% ( 3,000,000 + 300,000 + 200,000 + 550,000) = 607,500
In this case the housing benefit is sh. 550,000

11. The value of any benefit provided by an employer to an employee which is not covered by
the above clauses is the market value of the benefits, at the time the benefit is reduced by any
payment made by the employee for the benefit.
12. Paragraph 11 does not apply to any benefit expressly covered by Section 19(1)(a) or (c) to
(h).
13. In this Schedule, “statutory rate”, in relation to a year of income, means the Bank of Uganda
discount rate at the commencement of the year of income.

14. If an employee has worked for the organization for for 10 years or above, 75% of his
terminal benefits is taxable while 25% exempt.

EMPLOYEE’S RELIEF / (NON TAXABLE EMPLOYMENT INCOME)

The following are excluded from employment income:-

i. Passage/transport of a person recruited form outside Uganda and not a Ugandan citizen. The
money paid for his transport by the employer is not taxed.
ii. Medical expenses including premiums for medical insurance and discharge of medical expenses
by the employer (medical refund). However, medical allowances are taxable. If he is given more
than he actually spent, the difference is taxable as a benefit.
iii. Life insurance premiums paid by taxable employers.
iv. Cost incurred while performing duties of employment. If re-imbursement is higher than the
actual, the excess is taxable.
v. Meals and refreshments provided to fulltime employees at work, at the premises of the
employer solely for the benefit of employees on equal terms.
vi. Low cost benefits. (any benefit below 10,000 PER MONTH UGX).(s. 19.29f)
vii. Pension contribution e.g. NSSF contribution.
viii. Beneficial loans. The loan from employer to employee which is less or equal to 1,000,000Ugx
doesn‟t constitute taxable income. If the loan interest is lower than the statutory rate (BOU
rate), the difference is taxable.
ix. Employment income below threshold i.e. 235,000Ugx/month or 2,820,000 Ugx /year. This is
for only nationals.
The following are not allowed deduction
 Maintenance of one‟s family
 Travelling to and from work
 Alimony (amount paid by one to another on divorce and
 Cost incurred on changing employment to another.

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 x. 25% of the terminal benefits where the worker has spent more than 10 years at the
given work place.

HE PAYE SYSTEM.

PAYE (Pay as You Earn) is a system of revenue collection where employers deduct tax from
their taxable employees. It is done at source. PAYE is not a tax but a method of collecting tax by
URA. All incomes of the employees are taxed whether paid in cash or kind.

Tax Rates for Employees

The Income Tax Act obliges employers while making payment of employment income in any
month to withhold tax at the prescribed withholding PAYE tax rates and pay the tax withheld by
the 15th day of the following month to the URA.

The income tax rates applicable to resident individuals are –

Not exceeding Ushs.2,820,000 (235,000 per month) Nil

Exceeding Ushs.2,820,000 (235,000 pm) but not exceeding Ushs.4,020,000 (335,000 pm)
10% of the amount by which Chargeable income exceeds Ushs.2,820,000 (235,000 pm).

Exceeding Ushs. 4,020,000 (335,000 pm) but not exceeding Ushs.4,920,000 (410,000 pm)
UShs.120,000 (10,000 pm) plus 20% of the amount by which chargeable income exceeds
Ushs.4,020,000 (335,000 pm).

Exceeding Ushs.4,920,000 (410,000 pm)

(a) UShs.300,000 (25,000 pm) plus 30% of the amount by which chargeable income exceeds
Ushs.4,920,000 (410,000 pm); and
(b) Where the chargeable income of an individual exceeds Ushs.120,000,000 (10,000,000 pm) an
additional 10% charged on the amount by which chargeable income exceeds Ushs.120,000,000
(10,000,000 pm).

The income tax rates applicable to non-resident individuals are

Not exceeding Ushs. 4,020,000 (335,000 pm) 10%

Exceeding Ushs. 4,020,000 (335,000 pm) but not exceeding Ushs. 4,920,000 (410,000 pm)

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Ushs.402,000 (33,500 pm) plus 20% of the amount by which chargeable income exceeds
Ushs.4,020,000 (335,000 pm).

Exceeding Ushs. 4,920,000 (410,000 pm)

(a) Ushs.582,000 (48,500 pm) plus 30% of the amount by which chargeable income exceeds
Ushs. 4,920,000 (410,000 pm); and
(b) Where the chargeable income of an individual exceeds shs.120,000,000 (10,000,000 pm) an
additional 10% charged on the amount by which chargeable income exceeds Ushs.120,000,000
(10,000,000 pm).

NB. Meals, Refreshment, and Entertainment Expenditure

A deduction is allowed for expenditure incurred by a person (an employer) in providing meals,
refreshment, or entertainment in the production of income included in gross income, but only
where –
(a) the value of the meals, refreshment, or entertainment is included in the employment income
of an employee under Section 19(1)(b) or is excluded from employment income by Section
19(2)(d) or (e) ; or
(b) the person‟s business includes the provision of meals, refreshment, or entertainment and the
persons to whom the meals, refreshment, or entertainment have been provided have paid an
arm‟s length consideration for them.

Worked examples.

1. The following information relates to Mr.Karwemera, stores manager of Kanungu cosmetics.

He is paid monthly.
UGX
Basic salary 126,000
Hardship allowance 245,000
Being around allowance 200,000
Entertainment allowance 400,000
Top up allowance 250,000
Private benefit 50,000
Transport allowance 200,000
Medical expenses 129,000
Life insurance premium 452,000
Additional information
a) The company pays his monthly contribution to NSSF worth 250,000UGX
b) On January 1st 2004, he obtained a loan from the employer worth 16,000,000UGX,
paying interest of 3%. The statutory rate is 12%.
c) He resides in a company house whose market value is 450,000. He pays 125,000/month.

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d) The company meets his utility expenses per month worth 125,500
e) He is entitled to domestic servants „allowance of 250,000 monthly.
f) He receives 9,900Ugx /month as a special duty allowance.
g) The company paid him 250,000 for the medical expenses of his children.
h) He was provided a vehicle worth 24,000,000 on 1st January 2004. He uses it on weekends
only.

Required;

To Compute his taxable employment income and tax liability for the month of January.

SOLUTION:
KARWEMERA’s TAXABLE EMPLOYMENT INCOME AND TAX LIABILITY
Ugx

Basic salary 126,000

Hardship allowance 245,000
Being around allowance 200,000
Entertainment allowance 400,000
Top up allowance 250,000
Private benefit 50,000
Transport allowance 200,000
Loan benefit (12%-3%)x16,000,000 = 120,000
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Utility benefit 125,000
Domestic servant benefit 250,000
Housing benefit (450,000-125,000) 325,000
Special duty allowance 9,900
Private medical benefit 250,000
Motor vehicle benefit 20% (24mX104/365)-0=113,973
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TOTAL TAXABLE INCOME 2,665,373

TAX LIABILITY
2,665,373-410,000=2,255,373
2,255,373x30%= 676,612
Add: 25,000
Total tax 701,612

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2. Kansiime is a resident individual employed by GLOBAL (U) Ltd. Part of her
appointment letter gives the following details.

UGX
Basic salary 24,000,000 per anum
Hardship allowance 600,000 per month
Medical allowance 400,000 per month
Entertainment allowance 200,000 per month

Her additional information for the month of February 2014

i) On February 1st 2014, she obtained a loan from the employer worth 3,000,000 Ugx,
paying interest of 1%. The statutory rate was 21%.
ii) She resides in a company house whose market value is 200,000 Ugx. per month. She
pays 50,000 Ugx. /month as her rent contribution.
iii) The company met her utility expenses per month worth 1,200,000 Ugx. for the whole
year ending 30/6/2014.
iv) She is entitled to domestic servants‟ allowance of 100,000 Ugx. per month.
v) She received 130,000 Ugx. in the month of February as a special duty allowance.
vi) The company paid her 290,000 Ugx. for the medical expenses of her children.
vii) She was provided a vehicle worth 28,000,000 Ugx. on 1st January 2014. She uses it
on Sundays only for her private business.

Required;
Compute her taxable income and tax liability for the month of February 2014.

Solution

KANSIIME‟S TAXABLE INCOME AND TAX LIABILITY

Basic Salary (24m/12) 2,000,000

Hardship allowance 600,000

Medical allowance 400,000

Entertainment allowance 200,000

Loan benefit (1) 30,000

Housing benefit (200,000 – 50,000) 150,000

Utility benefit (1,200,000/12) 100,000

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Domestic servant benefit 100,000

Special duty allowance 130,000

Medical benefit 290,000

Motor vehicle benefit (note 2) 66,484

Taxable income 4,066,484

Tax liability = [ (4,066,484 – 410,000)*30% = 25,000]*1/12

= 1,096,945 – 25,000

=1,071,945 /12

=89,329 UGX

NOTE 1. Loan benefit computation ( 12% *3,000,000)/12

= 30,000 UGX

NOTE 2 Motor vehicle benefit = 20%(A *B/C)-D

A=28,000,000 B= 52 Days C= 365 Days and D= 0

= 20%(28,000,000*52/365) – 0

= 66,484 UGX

EMPLOYER’S OBLIGATION

Withholding:

To deduct the correct tax at the time of effecting payment to every liable employee

Payment:

To pay the total tax by the 15th day of the month immediately following the month in which
emolument was paid.

Accountability:

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Account for the tax deducted to every employee on a monthly basis

Maintenance of Employees’ Records:

To maintain records and keep them for inspection by URA on demand for at least five (5) years.

EMPLOYEE’S OBLIGATION

Employees deriving income from more than one source are required to complete an end of year
return to declare:

a) Total income from all sources, including business income.

b) Total taxes paid at source such as PAYE, Withholding tax or provisional tax. This
excludes presumptive tax and rental tax paid by such employee.
c) Tax payable.

EMPLOYEE’S RIGHTS

An Employee:

a) Is not required to furnish a PAYE return if tax is fully deducted and paid at source.
b) Is entitled to claim refund of over-paid tax where applicable.
c) Is entitled to accountability for all taxes deducted and paid at source by the employer.
d) Is not required to furnish a return of income if his or her only source of income is from
employment.

WHAT HAPPENS IF TAX IS NOT PAID?

An employer who fails to withhold and pay the tax as required by law is personally liable to pay
the tax together with any penal tax and interest thereon.

116. Withholding of Tax by Employers

(1) Every employer shall withhold tax from a payment of employment income to an employee as
prescribed by Regulations made under Section 164.

(2) The obligation of an employer to withhold tax under subsection (1) is not reduced or
extinguished because the employer has a right, or is otherwise under an obligation, to deduct and
withhold any other amount from such payments.

(3) The obligation of an employer to withhold tax under subsection (1) applies notwithstanding
any other law which provides that the employment income of an employee shall not be reduced
or subject to attachment.

 Employees who are engaged on part-time basis are deemed in principle to be earning
income from more than one source.
 Part-time allowances/earnings are taxed at a flat rate of 30% of the gross

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  An employee aggrieved by this treatment may submit a return of emoluments from all
sources and make a claim of tax overpaid.

Employees deriving income from more than one source are required to complete an end of year
return. any benefit granted by the employer to the employee during a month,
where the total value of the benefits provided by the employer to the
employee for the month is less than ten thousand shillings; or

Is salary earned from working abroad taxed in Uganda If so, how?

For assignees who meet the definition of residents as defined above, income from all
geographical areas is taxed. However, they are entitled to credits of tax paid abroad. This does
not apply to short term residents who are present in Uganda for a period of not more than 2
years.

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