Managing personal

taxes 
DFI 201
LEC. 4
LECTURE OUTLINE

 Personal reliefs and deductions 

 Tax on employment income 
 Individual tax management strategies 
 Computation of PAYE 
 Filing tax return 
 TAXES

 Taxes refer to the mandatory charges that the governments impose on

citizens.
 Taxes are the main source of revenue for the government.
 Therefore, payment of tax is a compulsory requirement for all citizens and it
has implications on people’s personal finance decisions.
 Out of all expenses that people pay, taxes can take the largest share of one’s
total income.
What is the meaning of personal tax?

 a tax paid by people on the money they earn, as opposed to a tax that a

company pays on its profits:
 The government's tax cut reduces personal income tax rates.
 Taxable income is the portion of a person's gross income that the government
deems subject to taxes.
 Taxable income consists of both earned and unearned income.
 Taxable income is generally less than adjusted gross income because of
deductions that reduce it.
Personal tax planning Strategy

 Personal tax planning Strategy is the ability of an individual to effectively

reduce, defer, or eliminate some taxes.
 To successfully achieve this goal, it is essential to determine one’s current
tax liability and the impact of the liability your financial transactions.
  The assessment of personal income tax is done with respect to the taxable income with
an aim of ensuring legal payment of one’s fair share of taxes and maximizing on tax
benefits that are relevant to one’s financial situation. 
Taxes in Kenya

 There are several types of taxes collected in the Kenya. Among them:
1. Vat, which is levied (or imposed) on purchases when you buy them
2. Income tax, which is paid on incomes
3. Customs tax, which is paid on items imported from another country
4. Excise tax, which is paid on locally manufactured goods
5. Corporate taxes-levied on incomes earned by body corporate
6. Pseudo taxes-petroleum levy, airport tax, catering levy, stamp duty, etc
Personal reliefs and deductions

 Personal Relief: Personal relief represents the amount which can be deducted
by an eligible person from tax payable by him.
 Personal Relief applies to individuals with taxable income are entitled to a
personal relief of KSh2,400 per month and up to KSh28,800 per year as from
January 2021.
 When an employee has multiple employers, he is entitled to a relief from only
one employer (Income Tax Act, section 30).
Personal reliefs and deductions

 Here are the top personal deductions that remain for individuals, most of
which can only be taken if you itemize.
1. Mortgage Interest.
2. State and Local Taxes.
3. Charitable Donations.
4. Medical Expenses and Health Savings Accounts (HSA)
5. Student Loan Interest. ...
6. Education Expenses.
Computation of PAYE

 Step 1: Determine Gross taxable income

 Gross taxable income= basic pay+ taxable benefits + taxable allowance

 Step 2: Compute Taxable Income –recover allowable deductions. Examples of allowable deduction are NSSF and
private contribution to pension schemes and owner occupier interest

 Step 3: Calculate Taxes liability using tax rates and applicable reliefs. Examples of reliefs are personal relief and
insurance relief

 Step 4: Make Tax Payments and returns

 Step 5: Watch Deadlines-Avoiding Penalties e.g. Submit PAYE every 9th of month and NHIF paid by every 20th
of month

 In our progressive tax system, the government determines the amount that people pay at each income level. It is
explained in terms of marginal tax rates, or the rate that you would pay on your income.
Tax Management

 Taxesare a necessary part of life, but they

don’t have to be such a burden. There are
various tax management and preparation
techniques and methods that can be used
to reduce the amount of taxes you pay
and optimize the deductions and credits
available to you, both today and in the
future.
 Personal tax management strategies

 In order to manage your taxes, all type of taxes:

1) You should understand your tax situation, tax liability, payable and deadlines
2) Benefit from government incentives such as tax reliefs.
3) Take advantage of deductions and exemptions to reduce taxable income. Tax deductions and
exemptions apply on Tax Deductible Contributions such as Retirement Benefit Schemes, Mortgage Interest
Deductions, etc
4) Execute tax-effective investment strategies. For example Investment in assets where you can avoid
taxes on capital gains etc
5) Tax Compliance -Pay tax due in time to avoid penalties and interests and maintain good records
6) Establish Charitable Trusts or Foundations. Note charitable donations are tax deductible
7). Keeping complete and accurate Records. Record in law must be kept for at least seven years
8). Getting timely, competent tax advice from experts
9) When tax liability is erroneously assessed, you decide whether to challenge it via the legal tax
tribunals. Etc.
Strategies to Protect Income From Taxes

 These tips can help you reduce taxes on your income:

1. Invest in Municipal Bonds
2. Take Long-Term Capital Gains
3. Start a Business
4. Max Out Retirement Accounts and Employee Benefits
5. Use a Health Savings Account (HSA)
6. Claim Tax Credits
Personal tax management strategies

 Example one
   Martin Munga earns a gross salary of  Kshs 32,000 per month. The following
deductions  are to be effected  in his  payslip of  August 2018. Sacco loan kshs.4,000,
loan interest Kshs. 1,000,  NSSF Kshs 200, NHIF Kshs. 900 and union dues Kshs.500.
He works for the UON as a electrician.
 Required

1. Compute his tax payable

2. Prepare his payslip for December 2019
Suggested solution

Gross salary 32,000

Less :Allowable deduction-NSSF 200
Gross Taxable salary 31,800

2. Paye  computation
Bands Rate Paye
12,298 10% 1,229.80
11,587 15% 1,738.05
  7,915 20% 1,583.00
31,800 4,550.85
Personal relief 1,408.00
Tax payable 3,142.85
Suggested solution

3. Payslip preparation
  Martin Munga
Payslip
For the month of December 2018
Basic salary 32,000.00

Deductions
PAYE 3,142.85
NSSF 200.00
Loan deduction  4,000.00
What is a pay slip?

 A payslip is also known as a salary slip.

 It is a document that the employer issues to their employees at the same frequency as
their salary payments, whether those are weekly, bi-monthly or monthly.
 A payslip comprises the breakdown of the amount of pay before tax and other
schemes are deducted, as well as the net salary that the employee will receive.
What should be on a pay slip?

 A payslip should invariably contain certain data, namely:

 The employee’s personal information;
 The employee’s payroll number;
 The tax period and tax code;
 The amount of pay before deductions, or gross pay. It includes the basic
salary as well as all the allowances given to the employee (for instance, a
conveyance allowance, medical allowance, or performance allowance) ;
 The various deductions, which include taxes, social security, insurance, and
pension schemes;
 The amount of pay left after all these deductions, or net pay.
Assignment 1

 Example Two
 Hassan Gona’s  personal file shows he earns the following monthly:  Kshs 96, 000 
basic pay, Kshs 50000 house  allowance and  Kshs. 20,000 commuter allowance. The
following deductions  are to be effected  in his  payslip of  August 2018. Sacco loan
kshs 70,000 and interest Kshs. 7,000,  NSSF Kshs 200, NHIF Kshs. 1700 and union
dues,  Kshs. 1900.  He works for the UON as a Librarian.
 Required:
i. Compute his tax payable
ii. Prepare his payslip for December 2019
Assignment 1

 Example Three
 Noor Murad, an employees of the County Government of Mombasa earns Kshs 420,000
per month. The following deductions are to be effected in his  payslip of  December
2019. Sacco loan and interest 35,000,  Car loan and interest Kshs. 27,000, Jubilee
pension Kshs. 12,000, NSSF Kshs 200, NHIF Kshs. 1700 and mortgage loan Kshs.
75,000 and mortgage interest kshs. 10,000. She has provided a Life Assurance Policy
Certificate showing annual premiums payable of Kshs. 50,000. Effect  relevant reliefs
and deductions.
 Required

i. Compute his tax payable

ii. Prepare her payslip for December 2019
Filing a tax return

 Every Kenyan with a certain amount of gross income in a year must file a tax
return for that calendar year on or before the following June 30th through
the i-tax platform.
 If you have underpaid , you will owe the government—and will have to pay up
by the filing deadline, June 30th.
 If you have overpaid, you are eligible for refund from the government. On the
other hand, the tax credits (overpaid) can be used to reduce your taxes owed
liability in future.