INTRODUCTION
Taxation is an inevitable part of earning income. In Kenya, personal income tax is progressive, meaning the rate increases as your income does. Earned income is subject to Pay As You Earn (PAYE) tax, while income from investments may be subject to capital gains tax or withholding tax. Familiarizing yourself with these tax categories can help you plan your finances more efficiently.
Resource - File & Pay - KRA
Different Types of Income Are Taxed Differently
- Earned Income: If you're employed, your salary is subject to Pay As You Earn (PAYE) tax, which is a form of income tax deducted at source by your employer. The rates are progressive, ranging from 10% to 35% of 2023 Finance Act -
Pay As You Earn (PAYE) - KRA - Passive Income: Income from rental properties is subject to a different set of tax rules. Rental income is taxed at a rate of 10% on gross rent received. - Rental Income Tax - KRA
- Portfolio Income: Income from investments like stocks and bonds may be subject to capital gains tax or withholding tax. For instance, the sale of shares may attract a capital gains tax, while dividends may be subject to withholding tax.
Understanding Tax Brackets Can Help You Plan Better
Knowing the progressive nature of Kenya's tax system can help you plan your finances more efficiently. For example, if you're close to moving into a higher tax bracket, you might consider tax-saving investments or deductions to remain in a lower bracket.
Tax Deductions and Credits Can Reduce Your Tax Liability:
There are various ways to reduce your tax liability in Kenya. Contributions to retirement benefit schemes, for example, are tax-deductible up to a certain limit.
The National Social Security Fund (NSSF) and National Hospital Insurance Fund (NHIF) contributions are also mandatory but offer some form of social security and health coverage, which can be seen as indirect ways to manage your financial risks.
Additional Considerations
Digital Service Tax: With the rise of online businesses and freelancing, the Kenyan Revenue Authority (KRA) has introduced a Digital Service Tax on income from services provided through a digital marketplace. - What is digital tax
Turnover Tax: For small businesses with an annual turnover that does not exceed a certain threshold, Turnover Tax (TOT) is applicable instead of the standard corporate income tax. This is aimed at simplifying the tax process for small business owners. - Turnover Tax (TOT) - KRA