How to calculate PAYE in Kenya; A Guide for Kenyan Employers and Employees

Calculating Pay As You Earn (PAYE) in Kenya is a compulsory aspect of payroll processing for both employers and employees. Failure to comply with PAYE regulations can result in penalties imposed by the Kenya Revenue Authority (KRA). These penalties serve as deterrents to ensure timely and accurate tax payments. Late filing of PAYE can lead to a penalty of 25% of the tax due or a minimum of Ksh. 10,000, whichever is higher, while late payment incurs a penalty of 5% of the tax due and an additional 1% interest per month. These penalties underscore the significance of adhering to tax regulations and meeting tax obligations promptly to avoid financial repercussions and maintain compliance with the law

What is PAYE? 

Pay As You Earn (PAYE) is a system used in Kenya for collecting income tax from employees' salaries and wages. This method requires employers to deduct a portion of their employees' income and remit it to the Kenya Revenue Authority (KRA) regularly. PAYE operates on a progressive tax system, where the tax rate increases as an individual's income rises.

Under PAYE, employers are responsible for calculating the appropriate tax amount to deduct from each employee's pay based on their income level and the prevailing tax rates. This deducted tax is then submitted to the KRA by the employer. PAYE applies to various forms of compensation, including wages, salaries, bonuses, commissions, allowances, and other forms of income earned through employment.
 

The implementation of PAYE ensures that income tax obligations are met by employees throughout the year, rather than in a lump sum at the end of the tax year. This system helps in the efficient collection of taxes and ensures that individuals contribute to the country's revenue in a timely manner. PAYE plays a crucial role in the overall tax framework of Kenya, ensuring that individuals fulfill their tax obligations in a systematic and structured manner.

Understanding the Importance of the PAYE System for Employers and Employees

It is essential for both employers and employees to have a solid understanding of the Pay As You Earn (PAYE) system. For employees, knowledge of PAYE is vital as it empowers them to anticipate and plan for the amount of tax they are required to pay from their earnings. This understanding enables employees to manage their finances effectively and avoid any surprises related to tax deductions from their salaries.

 On the other hand, for employers, a thorough grasp of the PAYE system is crucial for ensuring compliance with tax regulations and the accurate remittance of taxes to the Kenya Revenue Authority (KRA). By being well-versed in PAYE requirements, employers can fulfill their tax obligations accurately and on time, avoiding potential penalties and maintaining a smooth and lawful operation within their organizations.

How to calculate PAYE in Kenya

To calculate PAYE in Kenya, follow these steps:

1. Determine the employee's gross income, which includes basic salary, allowances, bonuses, and any other taxable benefits.
2. Subtract allowable deductions such as pension contributions, NHIF, and NSSF contributions to arrive at the taxable income.
3. Use the KRA's progressive tax rates to calculate the tax due based on the taxable income.
4. Consider any applicable tax relief or rebates to arrive at the final PAYE amount.

Essential Prerequisites to Know Before Calculating PAYE

1. Basic Salary 

In Kenya, there is no fixed basic salary for all employees. Instead, the basic salary varies depending on the industry, job type, and an employee’s qualifications and experience. However, the government sets a minimum wage, which is the lowest amount an employer can legally pay an employee for their work. The minimum wage rates are reviewed periodically and are based on the cost of living and other economic factors.

 

2.  Minimum Wage in Kenya 2024 

Find more in this COTU document
General laborers in Nairobi, Mombasa, Nakuru and Kisumu: Ksh 15201.65 per month
All former municipalities and town: Ksh 14025.40 per month 
All other areas: Ksh 8109.90 per month

3. Social Health Insurance Fund (SHIF)

Social Health Insurance Fund (SHIF) is a new health coverage in Kenya that will take effect in 2024. SHIF replaces the National Health Insurance Fund (NHIF) and introduces changes in contribution rates and coverage. Specifically, the SHIF requires households with income from salaried employment to make monthly contributions at a rate of 2.75% of their gross salary, with a minimum monthly payment set at Ksh. 300. Additionally, the data from the NHIF will be retained until all claims are settled, ensuring a smooth transition between the two health insurance schemes.

4. National Social Security Fund (NSSF)

The National Social Security Fund (NSSF) is a Kenyan government agency responsible for the collection, safekeeping, investment, and distribution of retirement funds of employees in both the formal and informal sectors of the Kenyan Economy. Its rates were revised in 2024, and the new NSSF rates 2024 have been implemented to ensure adequate social security coverage for all workers in Kenya and the new NSSF rates calculations are 

Tier 1 = 6% of 7,000 = 420
Tier 2 = 6% of 29,000 = 1740
7, 000 + 29, 000 = 36000

420+1740 =2160
And Nssf applies to salaries beyond 36, 000.
 

What is the PAYE Calculation Formula?

To calculate PAYE we need taxable income.
So taxable income = Gross pay - NSSF
Then calculate the tax for each band:

- Up to KES 24,000: 10%

- KES 24,001 to KES 32,333: 15%

- KES 32,334 to KES 42,267: 20%

- KES 42,268 to KES 53,333: 25%

- Over KES 53,334: 30%

- Add the taxes calculated for each band to find the total tax.

- Subtract the personal relief of KES 2,400 per month from the total tax and Nhif relief.

Nhif relief = 0.15 * calculate_nhif(grossPay)

The resulting number is your PAYE.
Remember to keep up to date with the current tax bands and rates, as they may change over time.
 

How to Use a PAYE Calculator in Kenya

Instead of calculating PAYE manually, you can simplify the process by using a PAYE calculator in Kenya. To use a PAYE calculator effectively, follow these general steps based on the information provided in the sources:

1. Access a Reliable Calculator: Choose ElevateHR's online PAYE calculator specific to Kenyan employees.
2. Enter Gross Income: Input your gross income, which includes basic salary, allowances, commissions, and any other taxable earnings.
3. Deduct Allowable Contributions: Subtract any allowable deductions like pension contributions from your gross income to determine your taxable income.
4. Select the Correct Tax Year: Ensure you are using the calculator for the relevant tax year, as tax rates and thresholds may change annually.
5. Calculate PAYE: Let the calculator process your taxable income using the progressive income tax rates set by the Kenya Revenue Authority (KRA) to determine the PAYE amount.
6. Consider Other Deductions: Some calculators may also help you calculate other deductions like NHIF and NSSF contributions, providing a comprehensive overview of your net pay.
7. Review and Save Results: Once the calculator provides the PAYE amount and any other deductions, review the results to understand your tax obligations and take note of the figures for record-keeping.

By following these steps and utilizing a reliable PAYE calculator tailored to Kenya, individuals can accurately calculate their tax liabilities and better manage their finances.

ElevateHR Payroll Software for Automated PAYE Calculation

ElevateHR offers payroll software designed to streamline your payroll processing, including accurate PAYE calculations. Our system automatically calculates PAYE with up-to-date rates, ensuring compliance with statutory requirements. Stay informed with timely updates on PAYE regulations. Simplify your payroll management with ElevateHR.

Calculate your Net Pay and Gross Pay effortlessly with ElevateHR. Our comprehensive HR services include Employee Self-Service, Leave Management, Payroll, Community, Performance Management, Onboarding, Salary Advance, and much more. Request a demo now.