TAXATION OF EMPLOYMENT INCOME (SEC2 &19 ITA)

IMPORTANT DEFINITIONS
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:

1. Position of an individual in employment of another.
2. Directorship of a Company
3. A position entitling an individual to remuneration on permanent/ contractual
temporary/part-time.
4. Holding or Acting in a Public Office

Position of an individual in employment of another

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 continues 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

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 d. The hirer provides the working tools, plant and other relevant facilities for the hired
person to perform his work.

Directorship of a Company
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 arm bit 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.

A position entitling an individual to remuneration on permanent or contractual

temporary/part-time
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.

Holding or Acting in a Public Office

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 earlier of the time the
emoluments are paid or when the employee becomes entitled to the payment. Emoluments can be
in cash or non-cash (in kind).

COMPOSITION OF EMPLOYMENT INCOME

Employment income comprises of the following amounts according to the law:-

1. Amount of private/personal expenditure discharged or reimbursed by the employer.
2. The value of any benefits in kind provided by/on behalf of the employer.
3. Any amount in compensation of termination of employment or contract.
4. Insurance premiums paid by a tax-exempt employer for life insurance of an employee
and/or his dependents.
5. Payments in respect of change of employment/contract terms or payment for agreement
to any restrictive conditions of employment.
6. Wages, salary, leave pay, payment in lieu of leave, overtime pay, fees, commission,
gratuity, bonus, allowance (entertainment, duty, utility, welfare, housing, medical, any

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 other)
7. Discounts in shares allotted to an employee and profit/gain on disposal of such shares.
Note: all or any of the above in combination comprises employment income.
EMPLOYEE’S RELIEF
(Employment gains not included in chargeable income)
1. Medical Expenses: Discharge or reimbursement of an employee’s medical expenses.
2. Re imbursement of passage costs incurred by an employee in respect of his appointment or termination of
employment. This applies when;

 The employee is not a citizen of Uganda

 The recruitment or engagement must have been done outside Uganda
 The employee must be in Uganda for a sole purpose of serving his or her employers.

3. Life Insurance: Premiums paid by a taxable employer for insurance of the life of an employee
or his/her dependent.
4. Official Employment Expenditure: Allowances for or discharge or reimbursement of
expenses met by an employee while performing duties of employment.
5. Meals and Refreshments: The value of meals/refreshments provided to all employees at equal
terms in premises operated by or on behalf of the employer.
6. Retirement fund: Employer’s contribution to a retirement fund for the benefit of the
employee (employee’s contribution is taxable).
7. Local Service Tax: This is deductible before computing tax.
8. Other Benefits: Any benefit whose value is less than Shs10,000 during the month.
9. Threshold: The first Ush.235, 000 per month is tax free for all resident employees.
10. Terminal Benefits: 25% of terminal benefits (for employees who have served the employer
for at least 10 years)

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COMMON BENEFITS IN KIND

What is a Benefit In Kind?

It is facilitation directly/indirectly by an employer of an employee in necessarily contractual).
Taxable Non cash Employment benefits under the Law are:
 Private use of official motor vehicle
> Provision of Domestic Servants, Utilities.
> Meals, Refreshment, Entertainment
> Relief of Debt Obligations/Interest.
> Provision of property by employer to employee (at non arm’s length terms).
> Provision of Residential Accommodation.
> Interest on loans below the statutory rates.
> Any other benefits not classified above.
When is a benefit deemed to have been provided by an employer?
Note: A benefit need not be provided by the employer or be provided to the employee. It can be
provided by the associate of an employer or it can be provided to an associate of the employee.
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.
VALUATION OF BENEFITS IN KIND
The valuation of benefits for the purposes of subsection (3) of section 20 of the Act is determined
as follows.
1. Motor Vehicle Benefit
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; depreciated on reducing balance basis at a rate of 35% per annum for the
subsequent years.
B is the number of days in the year of income on 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;

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D is any payment made by the employee for the benefit.
2. Domestic Servants
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
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.
For example: If the company pays a gardener sh. 150,000 per month, but the employee contributes sh. 20,000 per
month, the benefit derived by the employee is sh. 130,000 (i.e. 150,000 - 20,000). If the employee does not contribute
anything, the benefit is sh. 150,000.
3. Meals and Refreshments
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.
For example: If the meals are provided for 26 days in a month, each meal costing 3,000 and the employee not
contributing anything, then the benefit is sh. 78,000 per month (3,000 x 26).
4. Utilities
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.
In this case, the actual payment receipts from the utility company can be used to ascertain the value (less actual
contribution by the employee if any).
5. Loans
Provision of loans at a rate below the statutory rate (BOU discount rate at the beginning of YOI)
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. Statutory rate here refers to the Bank of Uganda discount rate at the commencement
of the year of income.
For example: If an employer gives an employee a school fees loan of sh.400,000; a furniture loan of sh. 500,000 and
an appliances loan of sh. 300,000 at 10% interest per month when the statutory rate is 15%, the benefit would be sh.
60,000 (i.e. 1,200,000 x 15%) - (1,200,000 x 10%) = 180,000 - 120,000.
6. Waiver of obligations
Where a benefit provided by an employer to an employee consists of the waiver by an employer
of an obligation of the employee to pay or repay an amount owing to the employer or to any
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other person, the value of the benefit is the amount waived.
For example: In the month of January 2013, an employee owed a bank sh. 300,000. The employer decided to pay the
full amount for the employee on 31st January and opted not to recover that amount from the employee. The employee
has obtained a benefit equal to sh. 300,000 for the month of January, which should be part of her employment
income.
7. Transfer of property and Provision of Private services
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.
For example: The company transferred a car valued sh. 5,000,000 to an employee in February 2012. The employee
was asked to contribute sh. 1,000,000 for that car. The employee derived a benefit equal to sh. 4 million in February,
which should be included in his employment income.
8. Accommodation
Where a benefit provided by an employer to an employee consists of the provision of
accommodation or housing, in kind 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) Fifteen per cent 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.
For example: A company pays an employee basic salary sh. 3,000,000 per month; transport allowance sh. 300,000 per
month and medical allowance sh. 200,000 per month. They provided him with a company house whose market rent is
sh. 600,000 per month for which he contributes 50,000 per month.
The benefit derived by this employee is the lesser of:
(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
9. All Other Benefits
The value of any non- cash benefit provided by an employer to an employee which is not
covered by the above clauses is the market value of the benefit, at the time the benefit is provided
reduced by any payment made by the employee for the benefit.
TREATMENT OF PART TIME ALLOWANCES
> 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 pay.
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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.

EMPLOYER’S OBLIGATION UNDER PAYE

The income tax law further provides for obligation of the employer as summarized below:
> Withholding: To deduct the correct tax at the time of effecting payment to a liable
employee.
> Remitting: To remit the total tax by the 15th day of the immediately following month.
> Accountability: Account for tax deducted from every employee on a monthly basis.
> Maintenance of Employees’ Records: To maintain records and keep those for inspection by
URA on demand for at least five (5) years.
EMPLOYEE’S OBLIGATION/RIGHTS
If an employee is deriving income from more than one source, he/she must complete an end of
year return and declare:
> Total income from all sources including business income.
> Total tax paid at source such as PAYE, Withholding tax or provisional tax. (This
excludes presumptive tax and rental tax paid by such employee).
> Tax payable.
EMPLOYEE’S RIGHTS An Employee:
> Is not required to furnish return if taxpayer’s source of income is only one employment
and tax is fully deducted and paid at source.
> Is entitled to claim refund of over-paid tax where applicable.
> Is entitled to accountability for all taxes deducted and paid at source by the employer.
NB: It is in the interest of the taxpayer to file a return of income where he/she has multiple source
of income. No one can enjoy a refund of overpaid tax without making a declaration.
WHAT HAPPENS IF TAX IS DEFAULTED?
An employer who fails to withhold tax as required by law is personally liable to pay the tax
together with any penal tax and interest thereon.
However, the employer is entitled to recover the tax from the employee, if he wishes to do so,
but cannot recover the interest or penalty from the employee.

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 TAX RATES
Resident Individuals Income Tax Rates
Monthly chargeable income
Not exceeding Shs 2,820,000 (Shs 235,000 pm)
Exceeding Shs 2,820,000 (Shs 235,000 pm) but not
exceeding Shs 4,020,000 (Shs 335,000 pm)
Exceeding Shs 4,020,000 (335,000 pm) but not
exceeding Shs 4,920,000 (Shs 410,000 pm)
Exceeding Shs 4,920,000 (Shs 410,000 pm)
Non-resident Individuals Income Tax Rates
Monthly chargeable income
Not exceeding Shs 4,020,000 (Shs 335,000 pm)
Exceeding Shs 4,020,000 (335,000 p m) but not
exceeding Shs 4,920,000 (Shs 410,000 p m)
Exceeding Shs 4,920,000 (Shs 410,000 p m)
Rate of tax
Nil
10% of the amount by which chargeable income exceeds
Shs 2,820,000 (Shs 235,000 pm)
Shs 120,000 (10,000 pm) plus 20% of the amount by
which chargeable income exceeds Shs 4,020,000 (Shs
335,000 pm).
(a) Shs 300,000 (Shs 25,000 pm) plus 30% of the
amount by which chargeable income exceeds Shs
4,920,000 (Shs 410,000 pm) and
(b) Where the chargeable income of an individual
exceeds Shs 120,000,000 (Shs 10,000,000 pm) an
additional 10% charged on the amount by which
chargeable income exceeds Shs 120,000,000 (Shs
10,000,000 pm).
Rate of tax
10%
Shs 402,000 (Shs 33,500 p m) plus 20% of the amount by
which chargeable income exceeds 4,020,000 (Shs 335,000
p m).
(a) Shs 582,000 (Shs 48,500 pm) plus 30% of the
amount by which chargeable income exceeds Shs
4,920,000 (Shs 410,000 p m) and
(b) Where the chargeable income of an individual
exceeds Shs 120,000,000 (Shs 10,000,000 pm) an
additional 10% charged on the amount by which
chargeable income exceeds Shs 120,000,000 (Shs
10,000,000 p m).

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ILLUSTRATION ONE
John kimotho is a certified public accountant from Tanzania and is currently employed by
Stanbic bank as the head of the finance department. The appointment was effective 1 st January
2020 with a 3-year contract. As part of his entitlement, he is provided with a vehicle which he
uses for both official and domestic purposes on equal term basis. The vehicle is a brand new
Pajero purchased from a car dealer at Shs50 million. He is charged a monthly fee of Shs.300, 000
for the benefit by the employer.
He also earns the following incomes;
i) Basic salary of Shs5 million per month
ii) Children’s school fees at International School of Uganda at Shs5 million per child per
annum for his 2 children.
iii) He also receives transport and medical allowance of Shs1 million and 2 million per month
respectively.
iv) His club membership at Kampala Club is also paid for by the employer totaling Shs4 million
per annum.
v) He was reimbursed Shs4 million being cost of passage to Uganda when taking up his job.
vi) He was immediately provided with a house whose market rent is Shs600,000 per month for
which he contributes Shs100,000 per month.
vii) Travel allowance for his spouse of Shs2 million.
viii) The company pays his house keeper Shs200,000 per month.
ix) He was offered a loan by the employer of Shs100 million at an interest rate of 5%. He paid
back the loan after one year on 31st December 2020. The statutory bank of Uganda rate
applicable over the 12 months was 10%.
x) The company contributes 10% of his basic salary towards the national retirement fund every
month

Required;
a) Compute John’s taxable income for the year ended December 2020.

b) Compute John’s PAYE that should be withheld at the end of the year 2020.

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Illustration two
Mark is employed as a chief accountant of company X, a branch of a Sudanese limited company
in Uganda. For the 12 months period ended 31 st December 2019, the following were his terms of
employment;
i) Basic salary of Shs1,800,000 per month
ii) Life insurance premium amounting to Shs1,200,000 per annum
iii) Annual entertainment allowance of Shs920,000
iv) Medical allowance of Shs100,000 per month
v) During Christmas time, he was given 2 air tickets for himself and his wife for a private
holiday in USA. Each ticket was bought by the company on his behalf at Shs.2million.
vi) Under an employee share acquisition scheme, he was given an option to acquire 1,000 shares
on 1st October 2019 when the price per share was Shs1,000. He paid Shs10,000 for the
option to acquire the shares but did not exercise the option until 30 th December 2019 when
the market price per share was Shs1200.
vii) The company incurred medical bills of Shs250,000 in June 2019 for the medical treatment of
his spouse. The company’s policy considers re imbursement of certain employee medical
bills including their spouses.
viii) The company directly pays his shumber boy Shs130,000 per month but it recovers
Shs50,000 per month from his salary for this benefit.
ix) The company settled VAT arrears of Shs1,450,000 for his imported house hold furniture.
x) The company operates a restaurant which is exclusively for its senior officials. The annual
value of the meals and refreshments consumed by Mark amounted to Shs1,200,000 and they
were provided without discrimination.
xi) The company paid a landlord Shs200,000 per month for the house where he was staying.
However, the company made monthly deductions of 6% of his basic salary in respect of his
housing benefit.
Required;
Determine Mark’s chargeable income and tax payable there on for the year ended 31 st December
2019.

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Illustration three
Mary is employed as an internal auditor of Mukwano group of companies where she earns the
following monthly remunerations;
Basic salary of Shs 800,000
Leave pay (30 days) amounting to 30% of basic salary
House rent of Shs 150,000
Overtime pay amounting to Shs 60,000
Meals and refreshments of Shs 120,000
Medical allowance of Shs 400,000
Additional Information
i. Mary failed to pay her centenary bank loan amounting to Shs1, 090,000 including
interest; therefore her employer paid this loan on her behalf. She was also extended a loan
amounting to Shs 910,000 by the employer at an interest of 12% on 1st June 2016.The
bank of Uganda statutory rate was 20%.
ii. Included in the medical allowance is medical insurance premium worth Shs 240,000 paid
by the company on her behalf per month
iii. Commencing on 1st June 2016, she was provided with a company car whose cost was
10,000,000. She uses the car 2 days a week for private purposes. However the employer
deducts Shs 10,000 per month for this facility.
iv. Half of the meals and refreshments relate to those provided for domestic purposes and the
balance represents those consumed by her while performing official employment duties
in the field.
v. She bought used office chairs worth Shs50, 000 each from her employer paying a total of
Shs60, 000 for both chairs.
vi. The employer provided her with airtime amounting to Shs 9,000 for the month of June
2016.
vii. She did not take up her annual leave in June 2016 and instead she was compensated with
Shs 300,000

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viii. During the month of June 2016, the company made a provisional payment of PAYE
amounting to Shs 100,000 on Mary’s behalf.
Required
a) Compute Mary’s taxable income and the tax payable for the month of June 2016.
b) What adjustments would you make if Mary was a non- resident?

Secondary employment
The withholding tax regulations where an employee who is in more than one employment does not
inform any of the employers that they are the primary employers, the employers will withhold PAYE at
the standard withholding rate, which is the highest marginal rate, currently 40%.
Example (employee with one employer)
Determine the PAYE for an employee who earns Shs.27,000,000 per month from a single employer.
Example (employee with more than one employer)
Determine the PAYE for an employee who earns Shs.27,000,000 per month from a two employers.
 Primary source Shs.15,000,000
 Secondary source Shs.12,000,000

ASSIGNMENT ONE

Rose Ashly is a finance director with NIC Ltd in Kampala on full time basis. She is a citizen of
the republic of South Africa and has a four year contract with the company which began on 30th
June 2010 and ending on 29th June 2014. Her employment terms are as follows;
• Annual basic salary of UGX 300,000,000

• Medical insurance premium UGX 187,500,000 per annum

• The company rents a house for Ashly at a monthly fee of UGX 1,200,000 During the year
ended 30th June 2011, the following transpired;

a) The company paid one-third of her electricity and water bills which on average amounted
to a monthly charge of UGX 240,000
b) She earned a cash prize from her employer as the most supportive staff for the year of
UGX 2,000,000
c) The company compensated her for use of her Vehicle on company business at a rate of
UGX 1,300 per kilometre as its company policy. During the year it was established that
she had driven for 5,500 km on company business and she had been paid UGX 9,750,000

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 in this respect.
d) The company issued its shares to the public at UGX 500 per share. Ashly managed to
acquire 50,000 shares at UGX 400 per share under the employee share acquisition
scheme.
e) UGX 5,500,000 was the cost of air passage for Ashly and her family from South Africa
to Uganda on 15th July 2010.
Required; Compute Ashly’s tax liability for the year ended 30th June 2011.

ASSIGNMENT TWO
Mr. Olanya is a staff of Kavuyo Uganda Limited. He earned the following income in the year

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ended June 30, 2016.
a) Basic salary of Ugx.8, 000,000 per month.
b) Transport allowance of Ugx. 200,000 per month
c) Entertainment allowance of Ugx. 500,000 per month
d) Leave pay of 10% of his annual basic salary. This was paid to him on December 1,2015
e) Christmas bonus equivalent to 90% of his month’s salary paid to him on December
20,2015
f) In addition, he also received the following benefits
 He was provided with a company car purchased on September 1, 2015 at a cost of Ugx.
80,000,000. He uses the car for both official and private purposes. He contributed Ugx. 200,000
per month towards private use. He ceased to receive transport allowance on receiving the car.
 The company pays Ugx. 300,000 per month to the domestic worker who has been working for
Mr. Olanya’s family for the last three years.
 He lives in a company house whose market value is Ugx. 2,000,000 per month. Ugx. 200,000 is
recovered from his salary per month towards the cost of housing.
 His son was sponsored by the company for a 9 months Master’s degree in Business
Administration in the University of Leeds in the UK at accost of GBP 5,000 ( Exchange rate:
1GBP = Ugx. 4,200).
 On July 1, 2015; he received a loan of Ugx.50, 000,000 at an interest rate of 6% per annum, to be
deducted monthly over a period of 12 months. The market rate of interest was 25% per annum.
 The statutory rates per BOU were as follows; July 2014 = 15% and July 2015 = 11%.
Required: Compute Mr. Olanya’s tax payable for the year ended June 30, 2016.

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