TAXATION OF INDIVIDUALS

Tax remitted from Income from employment or service rendered

MONTHLY PAYMENTS

Cash benefits;

 Receipts from employment such as salaries, leave pay, overtime etc

 Allowances e.g housing, entertainment Hardship etc
 Expenditure incurred by the employee which is paid for by the employer such as grocery
bills
 Contributions paid by the employer for the employees insurance or mortgage
 Facilities; benefit or advantage enjoyed by the the employer in connection with
employment eg free transport, free company products etc (Minimum taxable aggregate
value of a facility is ksh 36,000 p. a)
 Servants; where the employer has provided servants to the employee such as cook,
watchman etc, the taxable value of the benefit is the actual cost to the employer eg
salaries paid to servants Services; eg provision of electricity and water.

The taxable benefit shall be higher off;

I. Prescribed amount by commission or

II. Actual amount paid

Furniture; incase the employer provides furniture for use by the employee,the taxable value is
1% per month of the cost of furniture.

Telephone services; where the employer has provided telephone services for the benefit of the
employee, the taxable value is 30% of the telephone bill paid

COMMISSIONERS PRESCRIBED BENEFIT RATES

TAX RATES TABLES

 Car benefit; where the employer has provided a car for the private usage of the
employee, the taxable benefit shall be higher off;
I. Quantified amount on the basis of cc rating of the car or
II. Prescribed rate of benefit of 2% per month of the initial cost of the car

However, where the car is hired or leased from a thirdy party, the taxable value is the cost of
hiring or leasing
 ILLUSTRATION ONE

REFER TO MR.OLE MBOGA QUESTION

 Basic salary of ksh 550,000 p.a

 A day and night watchman whose salaries were Ksh5000 and 6500 pm respectively
 Furniture was also provided at a cost of ksh280, 000
 A car of 2000 cc whose initial cost was ksh 1.4M was provided for his personal use
 He was granted free company products valued at Ksh 3,500 pm
 The company paid his telephone bill averaging ksh 4,000 pm

Required

Calculate his taxable income

MR OLE MBOGA

2017 COMPUTATION OF TAXABLE INCOME

ksh

BASIC SALARY 550,000

2 watchmen (5000*12)=60,000

(6500*12)=78000 138,000

Furniture (1%*12*280,000) 33,600

Car cc basis (2000cc)=86,400

(2%*12*1,400,000)=336,000 336,000

Telephone (30% of 48,000*12) 14,400

Free company products (12*3500) 42,000

Taxable Income 1,114,000

HOUSING BENEFIT

This arises where the employer has provided accommodation or means of payment

ORDINARY EMPLOYEES & WHOLE-TIME SERVICE DIRECTORS

Housing Benefit shall be higher of;

15% of total gains from employment

Market rental value of the house xx

Less;Own contribution towards rent (xx)

xx

ILLUSTRATION TWO

Mr. Matunda received a salary of ksh 40,000 in April, 2018. He was provided with a company
house to which he contributed 3% of his basic pay as rent. The market rental value of the house
was ksh 10,000 pm. A company car of 2000cc was provided for his personal use including a
house servant whose salary of ksh 5,000 pm was paid by the company

Required

Calculate his taxable income

SUGGESTED SOLUTION

MR MATUNDA

COMPUTATION OF TAXABLE INCOME APRIL, 2018

Ksh

Basic Salary 40,000

Car(cc rating)2000cc 7,200

Servant 5,000

TOTAL GAINS FROM EMPLOYMENT 52,200

House benefit (15% of 52,200) = 7,830

Market rental value 10,000

Less; Own contribution (0.03*40,000) = (1,200)

8,800 8,800

TAXABLE INCOME 61,000

 ILLUSTRATION THREE

Mr. Barasa is employed as a sales manager of Mega Ltd. He supplied the following details
relating to his year of income for the year ended 31st Dec, 2017

 Basic salary Ksh 60,000(PAYE 9,000p.m)

He received the following benefits

 Fully furnished house at a cost of ksh.300,000

 Free Lunch worth Ksh3,600
 Company car of 1500cc whose purchase cost was Ksh 800,000,25% of car usage was
estimated to be for private use
 Tuition fee at a local college amounting to Ksh65,000 p.a was paid by the employer
 A gardener and watchman each was paid 4,000 p.m by the employer
 A monthly entertainment allowance of Ksh 10,000
 Annual leave allowance of 5% basic pay
 He contributes Ksh20,000 p.m to a registered provident fund

Required

Calculate the taxable income for the year ended 31st Dec, 2017

SUGGESTED SOLUTION

Mr. Barasa

Taxable Employment Income

Ksh

Basic Pay (60,000*12 ) 720,000

Furniture (1%of 300,000*12) 36,000

Free Lunch (3,600*12) 43,200

Car benefit higher of;

(2% of 800,000*12) =192,000

1500 Cc rating =50,400

25%of 192,000 48,000

Tuition fee 65,000

Watchman (4,000*12) 48,000

Gardener (4,000*12) 48,000

Entertainment allowance (1,000*12 ) 120,000

Annual Leave allowance (5% of 720,000) 36,000

Taxable Employment Income/Gains 1,164,200

House Benefit (15% of 1,164,000) 174,630

Gross Taxable Income 1,338,830

Less: Allowable deductions

Contributions to provident fund lower of

30% of 1,338,830=401,649

Actual (20,000*12)=240,000 (240,000)

Net Taxable Income 1,098,830

b) Mr. Barasas Tax Liability

147,580*10%=14,758

139,043*15%=20,856

139,043*20%=27,810

139,043*25%=34,750

534,121*30%=160,236

Gross Tax Liability 258,410

Less: Personal Relief (16,896)

Less: PAYE (108,000)

Net Tax Liability 133,514

NOTES

PERSONAL RELIEF; An amount a tax payer is allowed to deduct from the tax payable but it
can only be claimed once.

The amount per month is ksh16,896 p.a or 1,408 p.m

INSURANCE RELIEF

Where the employee has a life insurance policy on his life or his dependants, he/she is allowed to
deduct an insurance relief of 15% of the premiums paid to a max. of 60,000 subject to the
following conditions;

 No relief shall be granted in respect for premiums on an insurance which secures a

benefit that might be withdrawn anytime at the option of the insured
 Only insurance policies acquired on or before 1st Jan shall qualify for relief
 Premium for any education policy of 10 years shall qualify for an insurance relief
 The premium may be paid by the employer or employee on his life/wife/children
 The contract should secure capital sum payable in Kenyan currency and the company
must be based in Kenya.

RATES OF TAX FOR INDIVIDUALS

1-10,164 10%

10,165-19,740 15%

19,741-29,316 20%

29,317-38,892 25%

Excess over 38,892 30%

INCOME OF A MARRIED WOMAN

The income of a married woman living with her husband is deemed to be the income
of the husband and is taxed on the husband. However, when calculating the tax on
the husband, the wife's employment income, and the wife's professional income have
specified treatment. The wife's income can be from any source e.g. employment, rent,
business, profession, dividend, interest etc.

A married woman will be treated as living with her husband and her income taxed on the
husband
Unless/Exceptions

a) They are separated under an order of a court or written agreement of separation;

b) They are separated in such circumstances that the separation is likely to be
permanent

c) She is a resident person and the husband is non-resident

Wife's Employment Income and self-employment income

For purposes of calculating tax payable, wife's employment and self employment income
qualifying for separate taxation is segregated from the husband's income and the tax on it
separately calculated at wife's employment income rate, which is the same as individual rate of
tax.

The wife's income will not qualify for separate taxation if she is employed by any of the
following:

a) a partnership in which her husband is a partner;

b) her husband;
c) a company where the husband and/or wife or both jointly control 12 ½% or more of the
voting power directly or indirectly, of the company;
d) a trustee or manager of a trust created by her husband.
The wife’s employment position is then said to be not at arm’s length and, therefore, the income
is not separately taxed.
Note:
Self-employment income for a married woman means business by the wife where husband
is not a partner nor employs the wife.
Wife's Professional Income
Wife’s professional income is also segregated from the husband’s income and the tax is
Separately calculated at "wife's employment and wife's professional income rate which is the
same as individual rate of tax.
The professions whose income qualify for separate taxation are accountancy, medical, dental,
legal, survey, architecture, veterinary medicine and engineering. Those who qualify are the
Professionals registered under the respective professional bodies e.g. doctors, engineers,
lawyers, accountants, veterinary, doctors, architects, quantity surveyors etc.

The wife's professional income will not qualify for separate taxation if it is from a partnership
where her husband is a partner.
The wife's loss is also deemed to be the loss of the husband. The deficit at the time of marriage
becomes the husband's deficit to be off-set against future income of the wife which is taxed on
the husband.
In case of more than one wife, income is still deemed to be the husband's.
Where the husband fails or is unable to pay tax due, the Commissioner of Domestic Taxes can
collect a portion of the tax from the wife which relates to her income taxed on the husband.

INTEREST
This means interest payable in any manner in respect of any loan, deposit, debt, claim, or other
rights or obligations, e.g. loans by banks and financial institutions, deposits to banks and
financial institutions etc.
Interest is assessed on a cash basis, which means that it is taxed when received not when
earned if not paid.
Interest income exempted from taxation:
a) Interest from Post Office Savings Bank Account. The Post Office Savings Bank does
not accept deposits of more than Sh 500,000. The interest from Fixed Deposit with the
Post Office Savings Bank is exempted from taxation.

b) Part exemption:
The interest of up to Shs.300, 000 from housing development bonds called the "qualifying
interest' is partly exempted from taxation, i.e. the first Sh.300,000 of interest on housing
bonds is subject to 10% withholding tax as final tax.

The "qualifying interest" here means interest received by an individual which does not
exceed Sh 300,000 in any year of income in respect of housing development bonds
held by that individual with a financial institution licensed under the Banking Act or
a Building Society registered under the Building Societies Act and which has been
approved to issue housing development bonds.
The housing development bonds are issued by a financial institution on payment of
money and the money earns interest. The money raised through issue of housing
development bonds is supposed to help in housing development.
The qualifying interest is taxed at the "qualifying interest rate of tax" which is the resident
Withholding tax of 15%.

DIVIDEND INCOME

Dividend is the amount of profit of a company which it pays to its share-holders in proportion to
their shareholding in any particular year.
It is income in the hands of the recipients.
The following are deemed to be payments of dividend to those receiving:

a) In a voluntary winding up of a company, amounts distributed as profits whether earned

before or during winding up, whether paid in cash or otherwise.

b) Issue of debentures or redeemable preference shares for no payment. The dividend is

taken to be the greater of nominal or redeemable value e.g.
§ nominal value Sh. 100
§ redeemable value Sh. 110
Taxable dividend is Sh. 110, (the greater of the two).
c) Payment for debentures or redeemable preference shares for less than 95% of the
nominal value and redeemable value whichever is greater e.g. payment of Sh. 70 in (b)
above.
95/100 x Sh. 110 = Sh. 104.5. The payment of Sh. 70 is less than 95% of Sh. 110 which
is Sh. 104.5. The difference Sh. 40 is taxable dividend income i.e. Sh. 110 – Sh. 70 =Sh. 40

The following dividends received by a resident company are not taxed on the company:
Dividend received by a company which owns or controls 12½ % or more of the voting
power(shares) of the paying company.
Note:
(i) Foreign dividends not earned in Kenya are not taxable.
(ii) Dividends are subject to withholding tax (tax at source) at 5% which is deducted by the
person paying and remitted to the Domestic Taxes Department.

This constitutes the final tax i.e. no further tax is chargeable for Kenya residents. Dividends are treated
as income of the year in which they are received.
EMPLOYMENT INCOME WHICH IS EXEMPTED FROM
The following employment incomes are not taxed as they are exempted from taxation:
i) Employment income of foreign embassy staff excluding locally recruited staff.
ii) Employment income of Organization of African Unity (OAU) staff, foreign and locally
recruited.
iii) Employment income of United Nations Organization (UNO) staff, foreign and locally
recruited.
iv) Allowances payable to the Speaker, Deputy Speaker, Vice-President, Ministers,
Assistant Ministers, and Members of Parliament. The salaries are however taxed.
v) Salaries, allowances, and benefits paid from public funds to the President of Kenya.
vi) Foreign allowances paid from public funds to Kenya officers serving abroad.
vii) Monthly pension granted to a person who is 65 years of age or more
viii) The first Sh.2000 paid to an employer per day as an allowance while on official duty
shall be deemed to be a reimbursement and therefore not taxable
ix) Non-cash benefits up to a maximum of Ksh. 36,000 per year

RENTAL INCOME

This is income from the use/occupation of property. Also includes royalties received from
copyrights, Trademarks, Patents etc

ALLOWABLE DEDUCTIONS

These are expenses a tax payer is allowed to deduct from the taxable rent income.This include;

 Cost of structural conservation necessary to maintain existing rent

 Normal costs of repairs and maintenance
 Land rates and rent
 Wages and salaries paid to workers such as caretakers,watchman,cleaners etc
 Insurance premium paid on premises
 Valuation expenses related to insuring/insurance policies
 Legal costs on debt collection/in defence of property
 Legal fees related to acquisition of a lease which is not more than 99 years
 Reasonable advertising/or promotion expenditure
 Management fees or commission paid to property management agents
 Cost of water, telephone &electricity when paid by the landlord

NON-ALLOWABLE DEDUCTIONS
These are expenses which a tax payer is not allowed to deduct from taxable employment income

 Cost of extension
 Structural alteration which is not necessary to maintain existing rent
 Capital expenditure on property

N/B

 Where the owner occupies part of the property allowable expenses shall be apportioned
accordingly
 Where property is not left for a whole year, expenses incurred for the whole year shall be
taken
 The owner is allowed to deduct mortgage interest on a loan borrowed to buy as property

WITHHOLDING TAX

This is tax deducted at source eg

Withholding tax on dividends and interest income

ASSIGNMENT

ADV.OF WITHHOLDING TAX

ILLUSTRATION THREE

Mr. John is married to 3 wives. He is an employee of ABC Ltd. His income for the year 2017
was;

1. Salary 800,000 p.a(PAYE 65,000)

2. Bonus 45,000

3. Interest Income

-Post office savings bank 48,000(tax free)

-Housing development bond from HSK 300,000(tax free)

4. Dividend income Ksh.68, 000 (non-qualifying)

5. Rent Income

Ksh

Gross rent 249,000

Watchmen’s salaries68, 000

 Painting 27,500

Water &Rates 18,300

Fixing assign board 6,000 (119,800)

Net Income 129,200

6. Mr. John is provided with a house by the employer and 5% of his salary is deducted as
rent. The company has rented the premise at 6,000p.m

His 1st wife is employed in HITAC Ltd at Ksh15, 000 a month PAYE ksh.3000p.m.Mr John
owns 32% of the shares in the company

7. Upon marriage, Kadogo, the second wife received Ksh1, 2M from the husband and started
a shop. His net income for the year amounted to 400,000p.a.She also bought shares from
Kenya Airways Ltd and received dividends amounting to Ksh.43, 000 (qualifying)

8. Jacinta the 3rd wife does farming and produce valued at ksh.180, 000. However, the family
consumes about 85% of this produce

Required

1. Mr. Johns taxable income

2. Mr. Johns tax liability
3. Comment on any information not used

SUGGESTED SOLUTION

Mr. Johns

Computation of Taxable Income

1.Employment Income Ksh

Salary 800,000

Bonus 45,000

Total gains from employment 845,000

Housing(15% of 845,000)=126,750

6000*12=72,000

Higher of ;126,750-5%(800,000) 86,750

2.Dividend Income(Net) 68,000

Rent income(W1) 129,200

Wives Income(W2) 180,000

Total Taxable Income 1,308,950

Workings 1(W1)

Gross Rent 249,000

Less allowable deductions

Watchman salary (68000)

Painting ( 27,500)

Water and rates (18,300)

Fixing signboard (6,000)

129,200

W2

1st wifes employment Income=15,000*12

=180,000

NOTES

 Interest income is exempted from tax(post office)

 Kadogo is self employed(Income will be assessed on her,husband exercises no control
 Dividend income to kadogo will be assessed on husband since it is other income
 The produce from the firm is non-taxable sinse it’s a hobby ie consumes more than 25%

ILLUSTRATION FOUR

Mr.Kiplono is finalizing his tax affairs of the year of income 2017.He and his wife earn the
following incomes;

1. Mr.Kiplonos Incomes
  He is an an employee of X.Ltd and receives annual salary of ksh.600,000(PAYE 62,500)
 Pension scheme Ksh.100,000 by employer of Ksh 50,000 from his pay
 Dividends received 40,000 gross
 Withholding tax is deducted at source appropriately
 Gross interest received Ksh.18,000 of which ksh 10,000 was from post office savings
account
2. Mr.Kiplonos Expenses
 He paid VAT of Ksh52,000 on his purchases for the year(non-allowable expenses)
 Life insurance premium Ksh 15,000 to world life insurance company of UK(does not
qualify for benefit 15% because it is not Kenya based
 House money to first wife Ksh600p.m(non-allowable)
 Mortgage interest ksh 62,000 on the house he stays-owner occupied(allowable)
3. Mrs Kiplonos Income
 She is an employee of Y.Ltd with a mothly salary of 25,000 PAYE 7,800
 Profit from sale of plot Ksh.900,000
 She is a registered doctor and made a loss of Ksh 240,000 from her practice

Required

1. Compute Mr.Kiplonos taxable income

2. Calculate the tax liability
3. Comment on any information which you did not use in the calculation above

SUGGESTED SOLUTION

Mr. Kiplonos Taxable income

1. Employment Income Ksh

Salary 600,000

Less: Allowable deductions

Pension-lower of (30% of 600,000)

=180,000

Actual=50,000 (50,000)

550,000

2. Dividend Income (non-qualifying 40,000

3. Interest income (non-qualifying) 8,000

598,000
Less: Allowable deductions

Owner occupies interest (62,000)

Total Taxable Income 536,000

b) Mr. Kiplonos Tax Liability

121,968*10%=12,968

114,912*15%=17,236

114,912*20%=22,982

114,912*25%=28,728

Excess (536-446*30%=20,788

Gross Tax Liability 101,932

Less set off

PAYE (62,500)

WT dividend (5%of 40k) (2,000)

Interest (15% of 8k) (1,200)

Personal relief ( 13,944)

Net Tax Liability 22,288

c) NOTES

 Contribution by employer to a registered pension scheme is a non-tax benefit

 Interest from Post Bank is tax free
 Wifes income from employment and profession will be assessed on her

TAXATION OF A SOLE PROPRIETORSHIP

A sole proprietorship is not a legal entity. For this purpose it is not a separate taxable entity.
Income from the business is taken as income of the individual only and taxed on him or her.

ILLUSTRATION

Mr.Francis has given the following information for the year ended Dec, 2017
Net Profit 60,000

Alteration for building 25,000

Increase in general provision 4,000

Life insurance premium 14,000

Staff contracts &work permits 45,000

Fines &Penalties 18,000

Entertainment of customers 5,000

Donations 2,000

Depreciation 20,000

REQUIRED

Mr.Francis taxable profit and income tax payable.

SUGGESTED SOLUTION

Net Profit as per books 60,000

Add:non allowable deductions

Alteration 25,000

Increase in general provision 4,000

Life insurance premium 14,000

Fines &Penalties 1,800

Donation 20,000

Depreciation 20,000 83,000

Taxable Income 143,000

Mr.Francis Tax Liability

ASSIGNMENT

TAXATION OF PROFESSIONAL INCOME

 Where a person run a private practice, income from such business is taxable
 Normal business expenses are allowable
 Equipment and machinery qualify to wear and tear

PARTNERSHIP TAXATION

Partnership

 Partnership is not recognized as a legal entity.It is not taxed on its own

 Partners are taxed on either share of profit and losses arising from their partnership
 The adjustable income is therefore allocated between the partners at their profit
sharing ratio
 Each of the partners shall be taxed on his/her share of income as s distinct individual

A partner is taxed on the aggregate of the following income:

Remuneration paid to him on the partnership

Add: Interest on capital paid to him/her on the partnership

Less: Any interest paid by him/her to the partnership e.g interest on drawing

DISALLOWABLE EXPENSES

i. Salaries to partners
ii. Commission paid to partners
iii. Interest on capital
iv. Drawings by partners

INCOME NOT CONSIDERED AS INCOME FOR TAX PURPOSES

i. Capita introduced by the partners

ii. Amount transferred from a profit or loss
iii. Income from overseas
iv. Deduction in general provision for bad debts
v. Income exempt from tax by the income tax act

FORMAT FOR ADJUSTING NET PROFIT

Net profit as per the books xx

Add: non- allowable deductions

Salaries to partners xx

Commission to partners xx

Drawings by partners xx
Interest on capital xx xx

Less: Interest on drawings xx

Non-business income xx ( xx)

Taxable Partnership Income xx

ALLOCATION OF PROFITS AMONG PARTNERS

Partners A B C TOTAL

Salaries xx xx xx xx

Commission xx xx xx xx

Interest on capital xx xx xx xx

Interest on drawing (xx) ( xx) (xx) (xx)

Drawings xx xx xx xx

Share of profit xx xx xx xx

Taxable partnership income xx xx xx xx

Other Incomes

Rent xx xx xx xx

Dividends xx xx xx xx

Interest xx xx xx xx

Total Taxable Income xx xx xx xx

N/B

The other incomes are distributed/shared equally and not according to profit sharing ratio

Total profit shared be djusted for

SUGGESTED SOLUTION

X,Y AND Z are in a partnership